Zoom Trading position Refers to gradually establishing and unloading your position when certain milestones are reached.
Expanding a trade means that you first establish a partial position, such as 25 shares of a 100-share target position.
If the market moves in your direction or shows favorable price movements, you have added another “layer” to the transaction, and you now own half of the entire position. Maybe the stock has risen a bit and you decide to buy another 50 shares. At this point, you have established the entire position with three purchases instead of one purchase.
Scale-out works the same way. Maybe you sell a part of your position to make an immediate profit, and then set a trailing stop loss for the rest.
Therefore, rather than buying or selling the entire position at once, it is better to proceed in batches.
Of course, this is just a way of doing things, with its shortcomings and advantages, which we will introduce in this article.
Why would traders expand and shrink their positions?
If you want to succeed in this game, you must accept one of the most basic trading principles: the market is not a chess game that can be solved perfectly.
There is a high degree of randomness, and it is easy to trick you into finding patterns in noisy noise.
In other words, there is no 100% best buy/sell price. You just can’t know. The best trading algorithms developed by the world’s most prominent quantitative analysts cannot even be known.
Therefore, even if your trading idea itself may be completely valid, the specific price at which you enter the transaction is somewhat arbitrary.
By imposing arbitrary entry and exit restrictions on our transactions, we may miss some good opportunities due to inflexible trading rules.
For this reason, some traders choose to enter their positions through several partial positions in order to obtain the “average price” set by the transaction and exit when their initial entry is poor.
Therefore, knowing that any transaction you make will not be perfect, so it may make sense to verify your transaction before you make a full-size transaction. By entering part of the position and waiting for the market to further confirm your trading ideas, you will be dispatched.
If the transaction deteriorates immediately, you can only bear the loss through a partial size position.
As a demonstration, let’s take a look at the Nvidia (NVDA) chart below.
We have a potential trend continuation setting; the stock has risen sharply and is now “taking a breath” and entering a narrower range. Suppose we want to buy near the bottom of the range highlighted on the chart.
One option is to set one Buy limit order At the bottom of the range, but what if the stock never touches the bottom of the range again and moves on without us?
You can argue that this is just a transaction interruption; we cannot violate our trading rules. But other traders may have different views on this.
Other traders may open some positions around here, near The bottom of the range to see where the market is going, while leaving another buy order for another partial position at the bottom of the range.
The pros and cons of zooming in and out
The most significant advantage of expanding and shrinking positions is that it can provide you with additional flexibility when trading.
Take the edge case we demonstrated in NVDA in the previous section as an example.
We scaled up and down to reduce the number of transactions we missed, because at least we got a deal that took off and moved before we were fully positioned, rather than simply getting us into trouble.
This increased flexibility allows you to seize the opportunity of a trading setup that suits your overall situation but may not yet meet the exact quantitative criteria.
Because we know that the market is random, imperfect, and does not fit your model, it makes sense to seize such opportunities.
Imperfect execution also has more freedom, because you are not completely controlled by the first price you get. Especially in day trading, it is easy to get caught up in the trading process and realize that you have missed a key factor.
The cost of making these mistakes in full-size positions is much higher.
Many traders also find that expanding and shrinking positions increases the consistency of their trading. This gives them more time to observe the market and gain a higher intuition when your funds are actually in the transaction.
From there, you can decide whether you want to further promote the transaction and possibly avoid some wrong transactions.
Although one of the main advantages we mentioned is that you may miss fewer opportunities, we must consider the opposite, that is, the best opportunities may pass before you get a full position.
Trying to minimize the tug of war between wrong trades at the expense of missing potential home runs is a bit of a reverse selection problem.
In a sense, you exclude the best trade (the fastest effect and moving in your direction) from the trading results because you spread your position.
Therefore, the question of whether to expand or reduce the transaction scale is not simple.
Zooming in and out may also add potentially unnecessary complexity to your trading, especially if you are a novice trader. If you are just accustomed to executing trades, insisting on stop losses, etc., then trying to divide a trade into several microtransactions may make things too complicated.
The potentially most dangerous disadvantage is that expansion and contraction give you the opportunity to make excuses for losses. By proving it to be in the position of the “sense”, it is easy to deny yourself that you have made a mistake.
Scaling does not mean breaking your rules and trading everything in your eyes, just to understand the market.
If you are a fan of trading podcasts, you will find that one of the most common game changers for day traders is to switch from “dual” positioning to expanding and contracting trading.
They often say that they don’t know when the market will turn or how far it will go, so they try to minimize the impact of their educated guesses, and almost take the average of multiple guesses by expanding and shrinking.
Therefore, although it can be a powerful trading technique, use it wisely and be aware of its shortcomings.
Finally, trading is both science and art, so if something continues to work, stick to it.
Otherwise, don’t be afraid to trim fat.