Whenever you talk to other traders,
there is always someone who feels
certain trading rules are gospel and
other rules are foolish.

Sure, trading rules about cutting losing
trades off at the knees when it’s hit
the point that invalidates the premise
is one that I can get behind. Those
rules are all about saving your trading
account because once the account is
finished, so are you.

But there are other rules that many
trading courses talk about. Rules that
many traders hold dear and follow to
the letter.

The issue becomes when you can’t see
the folly behind buying into your rule
and discounting other trading “rules”.

There is more than one way to make profits.
There is more than one way to enter a trade.
There is more than one way to deal with risk.

The issue is finding what suits you as a
trader AND fits the trading style and
plan that you have chosen. I want to
recreate a chat with two traders I had
where each had separate thoughts on
two popular variables in trading that
we have all heard and read about.

Scaling out of your position as the
trade goes in your favor allows you the
benefit of taking profits and reducing
your risk at the same time.

This chart here shows a trade entry
that may or may not be a valid entry.
This is for sample purposes only.

The trade rallies nice and the green
line represents a higher time frame
swing level. These areas do have a
tendency to hold up price and if this
move is a trend continuation, it should
break the level.

We don’t know if it will break the level
but we do know these levels do have
volatility as different interests take
action. A safe scale out that reduces
risk is right before this area where you
see “1st scale”.

You can see there were competing
interests at the level as shown by the
yellow box but buying pressure wins
the battle.

Price makes a high but there is not
structure to the left that stood out
that would indicate there could be
resistance. Price falls but then rallies
again but this time, there is clearly a
structure level where we could take
profits.

As price rallies, it hits the high where
you would scale out again (2nd scale).
Clearly, this level had selling pressure
(could it be others who use this level
to exit longs?) which, depending on
your strategy, could have you buying
the lows when price starts to rally
again.

The main issue people have with
scaling out is that if you don’t hit the
first scale out and price reverses, you
get stopped out full position.

On the flip side, your profits are not
full position profits because you have
taken off positions while the trade was
moving in your direction.
Fair points.

The other trader in the conversation
was not a fan of scaling out for the
reason of less profits, full stop outs.
This trader stuck to his guns and
actually called scaling out your trades
“foolish behavior”.

He went on about his trade system
which was, in brief,
Use limit orders for entries
Target structure levels for profits.

Pretty common basics that many trade
plans call for but there is an issue that
this trader didn’t think of while he was
bashing scaling out.

I told this trader that his limit entries
have issues that can have huge
consequences on his profitability.

What is a limit order?
A buy limit for example is an entry order
that sits below current price. If/when price
reaches/trades through your entry price,
you are filled. This allows you the benefit
of having the market come to your price
and not have you chasing the move.

Problem.
Take a look at this chart.

The line “a” represents resistance
busted through and the trader sets a
limit order in that area to catch the
bounce.

The stop is placed at “b”. As you can
see, the trade gets filled and then
stops out for a full loss.

Here at “c” we have a trend line from
the highs off to the left. A limit order
is set at the line and what you can’t
see, there is a small congestion area to
the left that helped support this trade.

Price punches down to the area,
misses the limit price and then rallies
strong for over 400 pips before
offering another possible entry area.

Do you see the problem?
While this trader bashes scaling out,
he fails to understand that he will
participate 100% in all losses as well.

However, he will not participate at all
(at times) on large moves if price does
not come to his area.

As a side note…if your trade plan uses
limit orders for trade entries, have you
factored in no fills into your testing to
see if you have valid samples?

Keeping an open mind is paramount
when choosing a trading plan, trading
rules, and trading method. This one
trader was so adamant that scaling out
was a fools game that he totally
missed the boat on the downfalls of
his trading method.

There is nothing perfect about trading.
There will be trade-offs in many
aspects that you should account for
when deciding on your plan of attack.

All of the trading rules and trading
“truths” for the most part can be
rethought and dissected as they
pertain to you as a trader.

Question everything you hear.
Question everything your see.
Question everything you read.