ASX CFD's Trading Managing Risk Scaling Or Pyramiding - Also Elliott Wave Fibonacci
By Peter Mathers

Part of trading for a living is accepting a calculated loss, it's simply a part of the trading game.
New traders need to come to terms with handling a loss both financially and emotionally. Being a good loser helps create a winning trader as there is much to learn within a loss - it's your teacher, that is if you're using your eyes and ears. The reality is generally that the new trader will have more losses than a professional trader who has been trading for a living. So, accept that and do something about it.

Today I would like to put forward a few simple thoughts in managing your financial and emotional risk, specifically with a review of better set-ups and entries. The actual loss is only half the story with another aspect worthy of consideration being the recovery, the time it takes to recover from a dip in the equity curve.

What can be done to improve this situation that is within your control? Your approach to handling money and streamlining your entries can become a much easier and more relaxed affair. This seems a simple way to becoming a more professional trader, by managing financial risk, but simplifying what we do is better management.

There are many fancy names for trading a variety of time frames and the concept of scaling small positions into a market can be done in any time frame, however the new trader must understand that the shorter the time frame the more education would be needed as trading shorter time frame needs more trading skill.

For the point of the exercise I will take the middle ground and use position trading, with the aim of trading a trend between large numbers as many markets tend to travel from one large price to the next or from one degree of correction to the next. In this case I will use the Fibonacci Trading Levels as the trading analysis tool. The Fibonacci Trading Levels is a strategy simply using the Fibonacci sequence as price ratio, i.e. tracking market growth. The Trading Levels will assist with finding the price levels for scaling each position into the market.

Scaling or pyramiding

Scaling for me is risking a certain percentage such as 2.5% of total capital, then dividing that into say three smaller positions and feeding them into the same market at different price levels.
(Where pyramiding is risking 2.5% on the first trade then a further 2.5% on the second and third trades, this becomes a double-edged sword as the pyramid becomes too top heavy as a percentage in relation to total capital - pyramiding three times like this equates to 7.5% weighted in profit/loss of a market movement). Small steady profits within your overall trading plan, is a safer aim.

So armed with this method of scaling into most of your trades, you can create many benefits. You can benefit financially in that the first trade only becomes 0.83% of capital at risk (i.e. one third of 2.5%) so if the trade does not move in your favour and gets stopped out, you have then managed it more professionally and it is certainly less stressful. In fact it will probably be no stress as you can just get on with the job at hand because the loss is so small. If the trade does move in your favour to the second price level entry, you now have a small profit buffer to work off in placing the second trade. And so on for the third.

You are now building into the trade and the benefit here is that you are confirming your position as being on the right side of the market as it moves in your favour. You now add into strength (less if you are wrong and more if you are right)

How do I figure out how many CFDs to buy with the percentage at risk?

If you are risking 2.5% on the trade and you have a total of $10,000 then that would equal $250 to risk on the trade. What comes next is the 'Position Size' of the trade. This depends on the price difference between entry and stop loss, if it was 25 cents, what you do is divide the risk 25 cents into the $250 = 1,000 CFDs, this is very important, the position size of every trade you do is imperative to handling money correctly!

Let's look at scaling into a market with the Trading Levels. The Trading Levels simply put are divided into Major, Medium and Minor pricing levels

The Santos chart below was put out on the 26 March with the view of a long term trade from TL13 ($13) to TL2 ($20) the Medium Trading Levels were used as support and resistance levels but more importantly further entry signals. By scaling into the market and breaking down your initial percentage at risk is simply a sensible way for the new trader to approach the market.

When a market is approaching a large whole number such as Santos approaching $20 it's common for larger traders to start scaling out of their positions before this major level. In fact according to the Trading Levels analysis the profit taking at $20 TL2 would start at $18 which is considered a minor trading level mTL8. You can look at many other stocks at 18 and 20 to see this profit taking occurring at mTL2. In fact you can see it at any TL2 that is 8 cents 18 cents 8 dollars, 18 dollars 180 dollars such as IPL and watch RIO when it arrives at 180. The point of this is that it is also a good level for you to start scaling out and protecting your profit, scaling into a trade and scaling out makes the journey much smoother.

Peter Mathers Director, TradingLounge, has been trading since 1982. He started his professional trading with Japanese futures company Hoei & Shoin, who mentored and taught him the Japanese analysis techniques of Candlesticks and Renko. Practical experience of the Elliott Wave Theory followed with Australian company Tradewinds Pty Ltd, specialists in futures trading both in Australia and the USA. In London Peter traded commodities, derivatives and securities with Corporate Services International.

Back in Australia Peter has continued to refine his skills and constantly upgraded his knowledge of all current and well established theories and trading programs and online brokering platforms. The TradingLevels® concept was developed. Peter specialises in shares and CFDs and has been an educator with one of Australia's leading CFD providers.

http://www.TradingLounge.com.au and the TradingLevels Analysis Service have been developed by Peter to meet a growing demand for accessible, sensible education and his TradingLevels®-based analysis.

Peter is author of Trading CFDs in Today's Markets.

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