Video duration 13min 21sec. English subtitles to follow.
Scaling in to avoid loss
Hi Everyone. This is Al Brooks, and this is part of my Live Trades Series. I took a trade today in one of my actual trading accounts, not just a simulated account to illustrate how to manage scaling in to a losing trade.
This is TradeStation. Here’s today. This is the Globex market. The day opened right here, the day session. This Moving Average is based on the Globex chart. If you look at the day session chart, which I’ll show later in the presentation, the Moving Average is actually down here. So we opened above the Moving Average and we sold off, but we never went below the Moving Average. I’m going to speed this up so that we don’t waste time on prices that really don’t add anything.
We have a very climactic open. A series of Buy Climaxes – one, two, three, four. Typically you’d expect at least a couple legs sideways to down. It’s possible it’s one, pullback, two. It’s more likely it’s one, pullback, two. So it’s more likely that we’re going to form a Lower High and test this low. Less likely that we’ll just keep going up.
Reasonable to Sell
So it’s reasonable to sell. Possible Wedge, three legs up – one, two, and three. We have a bear bar closing below its midpoint, so I sold at the market on the close of that bar, betting that we’ll get a second leg down to this low. It’s possible that this breakout is strong enough to get three legs up starting the count over again. So instead of one, this becomes one, two, and three. The bears need to get a reversal here for a test down to that low or this low. So it’s reasonable to sell again, sell more, so now I’m short two contracts. I could exit on a stop above this sell signal bar, or I could exit if we get a pair of consecutive bull bars, or I could just hold short and look to sell more higher up.
It’s reasonable to take this short, but if we’re breaking above a Wedge, we might go up for a Measured Move up based upon the height of this Wedge. Now we have a big bull bar and a bull follow-through bar. Most traders, as soon as they see that, they should buy back their shorts on the close of the bar. However, it’s reasonable to hold short and to sell more, and I’m going to do that in this particular case to illustrate a couple things.
Could Have Gone Long
Now, if you wanted to, you could have exited short and gone long, and normally if you have a trade that is doing a low probability thing, something you think is unlikely, you’re going to get some kind of a Measured Move. Maybe a Measured Move up based upon the height of this Wedge. So if you were able to get out of your short and get long here, you’re probably going to rally for about a Measured Move based upon the height of this Wedge or based upon the height of this.
Scaling In to Avoid Loss
Instead, I’m short two contracts, and we have a very good bear bar. If it goes below that bear bar, it probably will come down low enough so that I can get back to breakeven. Now, I really need to sell double my position, so I just sold a fourth contract right now. I sold one, I sold two, I sat through the breakout, and now I’m trying to get out breakeven, which I just did. It hit the average entry price between this short, this short, and then the two shorts here, and I was able to get out breakeven.
Now, normally you should not be shorting in a strong bull trend like this, but this had a special situation, and I’ll talk about it in a moment.
Most Traders: Should Only Buy When Strong Bull Trend
In a strong bull trend like this, most traders should only be buying, and they’ll lose money if they short. You can simply buy above any bull bar closing at or near its high. Remember, this is the day session, and I said that the Moving Average was below the low of the day. So we opened here, above the 20-bar Exponential Moving Average, and we did not touch it. Now, there’s a special thing going on here. I’ve been trading now for, I don’t know, 35 years. I’ve never seen a day that opened above the Moving Average and went all day without touching the Moving Average. So 35 years, that’s a long time, and the statistic I use is 99.99% chance we’re going to touch the Moving Average. And in fact, 99.95% chance we’ll have at least 3 bars with lows below the Moving Average.
Selling below Bear Bar
So knowing that, it’s reasonable to sell below that bear bar, especially if you sold earlier and you’re scaling in. As I said, 80% chance if you sold here or here, and then you sold more here, you’ll get a pullback at least to your average price. This selloff went almost down to your original entry price, and had you held short, you would have come close to getting out breakeven on the original two sells and with a profit on the higher sell.
One other thing. I said 99.99% chance we’re going to get to the Moving Average. When it does, usually if you get a bull bar, you’re going to get a test of the high. So this was a bear trap. The bears hoped that the breakout, the close below that low, the close below the Moving Average, was going to lead to a bear trend. But as soon as you get a bull bar, you know the odds are 80% you’re going to go back and test the high. So I would look to buy again above a bull bar closing near its high here or here.
Experienced traders will buy all day, but a few will take shorts based upon the knowledge that the market is going to pull back to the Moving Average, and if they scale in, they can make money, or at least avoid a loss on their shorts.
Special Situation: Market Will Touch Moving Average
Again, special situation. The market goes 50 or more bars without touching the Moving Average. You know it’s going to touch the Moving Average. Well, you know anyway it’s going to touch the Moving Average. It does every day. I don’t remember a single day in 35 years when the market did not pull back to the Moving Average. So the odds are very high that we’ll get there. We can get there by going sideways or by going down. An experienced trader, if they see a bear bar closing near its low, like that or that, they’ll short, looking for at least a scalp.
The bears are not expecting a bear trend. They’re looking for a scalp, just a small profit down to the Moving Average. If they’re smart, they’ll look for a bull bar closing near its high for a test of the high of the day.
If Sell, 2 Choices: 1. Exit When Wrong
It’s reasonable to take this short. As I said, after a climactic rally like this, the market usually enters a Trading Range. And it did, but the Trading Range was up here, so it did not enter the Trading Range here. However, it probably was going to. As I said, probably we’re going to get a couple legs down – one, bounce, two. It’s possible that this was one, bounce, two. So it’s reasonable to short here. Most traders, if you get a bull breakout bar, a close above the prior minor Lower High here, and then a bull follow-through bar, you know we’re going higher.
So most bears should exit above this second bull bar and take their loss. But experienced traders can hold, knowing that if we get a bear bar closing near its low, at a minimum we should come back to the midpoint between the entry price below that bear bar and this bear bar. That took place over here, but since I scaled in, I sold here, I sold more here – my average entry price was a little bit higher and not down here.
Thinking About Getting Out
Most traders, if they’re short in a strong bull trend and you get a big bull bar closing above the high of the prior bar and closing above a minor Lower High – here, closing above the high of the past 15 bars – they should be thinking about getting out, and if the follow-through bar, the next bar is a bull bar, they definitely should get out. And the reason for that is if they’re looking to scale in, they’ll mess up. They won’t do what they need to do.
In fact, if they’re able to reverse the long, they’ll probably be able to make up for their loss. So if they sold here, sold more here, and bought two here, it’ll probably go up high enough to erase the loss that they got on those shorts.
But the reality is, most traders are not going to be able to reverse. Most traders do not reverse. I don’t like to reverse.
If Sell, 2 Choices: 2. User Wide Stops or No Stop and Scale In
Alternatively, if you don’t get out, the second choice is to hold short. Wait for a bear bar closing near its low and sell again. But not just sell one contract; you should be doubling your position. So if you short one here and one here, you’re now short two, and you should therefore sell two up here. You should double your position. It sounds easy, it looks easy, but it’s not easy.
The market came down a little bit below the average entry price, so if you had a limit order to get out breakeven at your average entry price, you could’ve gotten out there. Never scale in against a strong trend unless you’re trading small enough so that you can do the right thing if the market goes against you. Most beginners trade too big and they get scared, and they exit at the exact time when they should be doubling their position, and that’s the problem.
Doubling Size of Position
The beginner thinks, “Oh, I’ll sell one contract. That’s not too big. I’ll sell two contracts. That’s still not too big. I’m a little bit uncomfortable.” But can they sell two more here? If they’re already uncomfortable here, they’re not going to double their position here. If you’re selling and you did not get out above this second bull bar here, the correct thing to do is to double the size of your short here.
Scaling into Shorts in Bull Trend: Most Should Never Do It
Again, never sell in a strong bull trend unless you have a good reason to expect a profitable scalp, and if you’re experienced enough so that you don’t panic when the market continues to go against you. In this particular case, we’ve been above the Moving Average all day. We know there’s a 99.99% chance that the market will pull back to the Moving Average, and there’s a 99.95% chance we will have at least 3 bars with lows below the Moving Average.
This low is a little bit below, this low is below, that’s below. So now we’ve met the minimum objective. And then once you get a bull bar, after those 3 bars, 80% chance you’re going to go to a high. You could’ve bought above here, you could’ve bought more here. You know 80% chance we’re going to test the high of the day.
Often Better to Exit Breakeven
Most traders, when they’re wrong, it’s often better just to exit breakeven than hold for a profit. So selling here, better just to get out breakeven. This is a surprisingly strong breakout, and we may go higher, and therefore it’s better just to try to get out breakeven. Sold, sold, and then sold two more here. Here’s your average price. Get out there breakeven. You have a loss on here, you have wins on these two contracts. The net is a breakeven trade.
Never Be Greedy
Never be greedy when you’re wrong. Never hope that the market will go far your way when you’re betting against the trend. So if the market does something surprisingly strongly against your position, it’s better just to try to avoid a loss and not worry about making a profit.
Again, most beginners cannot do this. Most experienced traders do not do this. But a trader who understands what’s going on and they know the odds of the market pulling back to the Moving Average can do this. You have to trade small enough, and you cannot get scared when the market goes against you, and that means most traders should not do that.
Example of Selling in Bull Trend
This is an example of how, if you do sell in a bull trend and you understand that there’s a good reason for the market to go down, you can scale in against the bull trend and avoid a loss. If it went down initially here, you would’ve made a profit. If it went down here for a Wedge, you would’ve made a profit. Instead, it did that. Once it’s done that, it did something other than what you thought was likely. It’s better just to get out breakeven.
I’m Al Brooks. Thank you for watching this video, and I hope that you found it helpful. This is a video on scaling in to avoid a loss.
That was very interesting.
I would pay top dollar if there were live examples for each series in the standard course. Or perhaps at the end of certain amount of videos a live trading videos that puts together the principles and concepts together that were taught specifically in that section. These videos are what I had hoped for out of the “How To trade ____” of the course.
This really puts it all together for me. However, I realize Al’s live trading room does accomplish the same thing.
Im still in to the course but for all practicall purpose couldent agree mor!
Much appreciated Sir!
Thanks Al, the live videos helps me more than anything else.
Thanks for sharing ! great video !
Just for clarification. If the price didn’t touch the moving average for at least 50 bars, wait for 3 bars to close bellow the moving average, wait for a bull bar, buy above it, take profit at a test of the high of the day? 80% chance of success. And the stop should be probably a measure move down from where we buy to the high of the day? Is this correct?
The stop-loss goes below the signal bar, especially if it closes near the high.
Loving the live trades series and definitely looking forward to seeing more!
In the middle of the video, the pointers are not matching what Al talked about, it is minor problem, but might confuse beginners.
I have checked original recordings and Al’s pointer was off there too! I will add a note to video tomorrow to warn viewers.
Thanks for your feedback.
Oh that’s nothing. Try watching the free Trading Room sample video from 2020.
Haa… Update, I decided to fix the original problem and now replaced with video with near-perfectly synced laser pointer. : )
Great Video – Please keep doing these – Very helpful!
Love this series.
In this situation i don’t understand why Al see’s the opening as climactic and expects 2 legs sideway to down.
Is it not a pretty decent breakout?
Or would you expect more strength especially in the beginning of a breakout?
Actually there were several BOs with little or not PB so this is what made it unsustainable and climactic
That is a very strong breakout. However, remember that all trend bars are seen as a breakout, gap, climax, and vacuum and the characteristic that is predominant depends on the overall context. Also, a climax does not necessarily mean a trend reversal, it just means that the market potentially went too far, too fast and the directional conviction may be reduced. As pullbacks become deeper, the market would be going sideways to down simply due to the fact that traders are less willing to consume liquidity at the highs.
It is important to consider other characteristics of this breakout. Notice how the best trend bars are generally followed by an implied pullback or a small pullback and then the market breaks out higher. So is that truly sustained bullishness or is that a market that is potentially being pushed higher by bears recurrently giving up? The market isn’t stair-stepping so that means that scale-in bears are having a tough time making money, so I’d argue that trapped traders are playing a vital role in the strength of that rally. Furthermore, the big bull bars aren’t generally seeing immediate follow-through to the upside so there is potentially some hesitation to buy the highs.
The large bull bar around 7:45 with a tail on top is followed by two inside bars, likely a feeble attempt by the bears to bring the market back into the weak bear channel. The bull inside bar closing on its high was enough to find more aggressive follow-through from bulls and for bears to give up, creating that large bull trend bar. The stop is getting farther away though and we see some profit taking in the doji just comes after. Compared to the relative strength of those bars to the upside, that doji shows very little selling pressure and the market resumes up. Limit order bears who sold the high of the 7:45 bull bar were likely buying back their shorts, more so than scaling in, as the market went above the doji and bull trend bar. The resulting bull trend bar had a strong close on it’s high, but the follow through was two more dojis, with the second actually going below the low of the prior bar (a true pullback rather than just an implied pullback). Then finally, the market had 3 consecutive bull trend bars late in the rally, which is another potential sign of a climax. Dr. Brooks described it as 4 pushes, I see it as a tight spike and channel bull trend with a wedge top (7:45 bar is the spike, followed by implied pullback and then 3 additional pushes) – terminology doesn’t matter that much though, the point is that the market was showing signs that the market may need to catch its breath. That is why it can be described as being climactic – it’s going too far, too fast. Seeing weakness in strength and strength in weakness is helpful to keep in mind.
Thanks Al and Admin, for posting this video about scaling in to avoid loss. Yes I have been following this strategy and watching you on Trade room for a couple of years. I just wanted to add my learnings here, This MA technique works really well when following condition meets
Market is already more than 1% up or down (So potential for profit booking in last hour)
Current market time after 11:30 PST.
Market is more volatile with lots of trend bars.
Micro channel at end of the trend.
This MA technique does not really help us to get out without loss
When we have more doji/sideways bars after the initial trend.
Also the momentum is very less.
Hi BTC Admin,
Can we ask Al that he mentions what the probability of the trade is before taking it and also what his initial stop is. It will be very helpful if he talks a bit more about the Trader’s Equation prior to taking the trade.
Dont think there is such equation otherwise you dont really need to scale in to a lossing position. Interesting to see what Al will highlight.
Hi, thank you for the video. Is this 20 bars moving average? Thank you!
Yes, Al is using the Globex 20-period Exponential Moving Average (EMA) at the video start and then the 20-period EMA for the day session slides.
Love this video series – thank you!