Monday, October 17, 2011

Adding on


Many traders add on fresh contracts if the price moves against them. Personally, I think this is a poor choice to make. If you were wrong earlier, you are probably wrong now with a larger size. Occasionally, however, it makes sense to add on fresh contracts provided the odds are with you.

For example, today I went short below b4 and when the price moved against me I added on 1.75 points higher. Normally, I would be stopped out here but at this point it made sense to add on instead.

The conditions to add on for me are the following:

  1. The potential reward for being right is huge and the potential loss for being wrong is small: After b4 triggered, my stop was above it, so my add on position had only 4t risk but since it was a 1PB setup, the potential reward was 4 points at least, possibly 8 points or more.
  2. Entry is with-trend: The gap down, the strong b1 below ema, the failed H1 (already triggered) all point to at least a test of the low of b3, giving a with-trend entry.
  3. You were expecting a pullback due to price action: b4 had an entry side tail and most of it was overlapped by all prior bars so a pullback was very likely. Since you already expected a pullback you can enter lighter the first attempt and add on at the pullback.
  4. You are trading within your comfort zone: If you cannot be comfortable holding the extra contracts, you risk being shaken out mid-bar.
The following are poor reasons to add on:
  1. Your counter-trend trade went against you: This is the simply the best way to go bankrupt, throw good money after bad. Be a strong trader and let it stop you out. This will train your brain to enter on higher quality setups only.
  2. You think this will be a huge move and want to add on more contracts after the price has moved in your favor: This is usually a poor move. You should be getting out of your scalp position once the price moves in your favor, not adding on fresh contracts.

5 comments:

  1. Cad,
    For 2 legged pullback from b16 to b25, where does the 1st leg end?
    Thanks.

    ReplyDelete
  2. Nice trading on b4 and b5 Cad.
    If b3 was a possible 1rev and fBO long with a strong signal bar, presumably you felt it had failed when you shorted.
    How do you judge this in advance of the b3 low being taken out? Since b4 was a very poor EB for the bulls wouldn't they have kept their stops below b3 and reckoned on a pb given that b3 was OB?
    Thanks

    ReplyDelete
  3. Hi Cad,
    Thank you for your post, it is very useful. Do you ever look at the Globex to get more information on a potential 1rev or 1pb trade?

    Thanks!

    ReplyDelete
  4. z.cui,

    b16 to b25 was a WP, which acts like an A2. The two red bars break the move into 3 small pieces.

    Bend, the gap down, the strong close on b1 suggest a first attempt to reverse is unlikely to succeed. b3 was an outside bar and therefore not a serious signal bar on a weak open.

    Eumaeus, I don't look at the globex. I have tried it but it did not contribute to my win rate.

    ReplyDelete
  5. Why is the fact that b3 is an outside bar make it weak signal bar?

    Thanks

    ReplyDelete