I don’t like daytrading much – it means I end up glued to the screen – and I don’t usually have time for that. I try to develop a plan in advance, and look for signals to take a position. I try not to be too impulsive and opportunistic. It’s really important to have a clear reason to enter a trade. They’re dead easy to get into, but can be tough to get out of if you want to hold on to your money.

Typically, If I’m taking a position it’s because I want to run it. Usually, I’m not looking for a quick in and out. I’m looking for a more substantial move that might take a number of days, weeks or even months. Because I invariably work with small stakes that’s the only way I can make decent money. Of course, if it’s going horribly wrong, it’s best to get out sooner than later. That’s why stop losses are so important. Zebu has written a couple of excellent pieces about different approaches to stop losses, and how to know when to cut your losses.

A reason I like to ’scale in’ is that it’s a sensible way of controlling risk. You can wager a small amount of money and if the trade goes right, look to add to it. If it goes wrong, you have a pretty good idea about how much you’re going to lose. Here’s a slightly more mathematical explanation which explains why it’s good not to put big chunks of trading capital at risk all at once.

Scaling in is an approach I’d avoid if you’re ’scalping’ or daytrading unless you’ve caught a really big move, or you’ve got yards of capital that you’re happy to risk.

‘Suck it And See’ Trading
What I’m really keen on is trying to spot equities which are undervalued and which have potential for serious momentum. A couple that have served me really well this year are Pendragon and Barclays. In both cases I started out with very small positions but rapidly added to them as the market moved up. I’m in the process of building up similar moves in car dealer Inchcape and West African oil company Afren. Both pretty risky, so don’t necessarily jump in after me. I’ve been in those trades for weeks already, and my capital is fairly safe! So essentially what I have been doing is adding leverage by averaging up, but controlling the risk through careful placement of stop losses.

The key is to spot the winners and run with them. Professional traders develop a bit of an instinct for strong moves and they can be quick to add risk when they see potential. It’s an art that I’m trying to develop.

Some Principles That I Use

• If a trade moves into the money from your entry point, and you’ve moved your stop loss to protect your capital, that’s a point where you can consider adding to it. Check that it’s still trending strongly. Look for momentum, check the RSI, and check what the price is doing in relation to the moving averages and that it’s not on the wild fringes of the Bollinger bands on an hourly or 30 minute chart. If it does appear to be trending strongly, by all means add to it by opening a new position, particularly if it’s up by 2 or 3% from where you went in and it looks like it has good potential to go higher.
• It’s important to have a good idea about where you intend to close the trade. Set a target price, and if you want to be really disciplined, set a limit order so if the market gets there you take the cash. One of my biggest weaknesses is not knowing when to get out. I’m working on it.
• One strategy I try to use is to scale into a move, run through an upswing, and then cut half the position and leave the other half running with a fairly wide stop loss – that’s what I did with Morrisons last week. That way I get to bank some cash but I’ve don’t lose out on further potential profit.

Example Trade
Let’s explore a practical example: my recent trade in British Airways.

Why was I looking to go long BA? Four reasons:

1. Negative sentiment against the airline was, in my opinion, overdone. The shares looked oversold. They’d just unveiled a horrible set of results, traffic is down, BUT they’re one of the biggest airlines in the world: a much stronger proposition than many of their competitors, in my opinion. And they’re in a good position to gain market share through the potential merger with Iberia.
2. I was looking for a revival in the wider market. Airlines can be high ‘beta‘ stocks. When sentiment changes and people are buying into recovery, airlines can outperform in anticipation of better times to come.
3. There were persistent rumours about a convertible bond issue, which if achieved, would remove a lot of the uncertainty about BA’s financial stability for the next 18 months.
4. BA is reportedly one of the most shorted stocks in the FTSE 100, which could lead to a strong rebound as traders who are short selling cover their positions and buy shares back.

So here’s how I traded it.

• On Monday 13th, I bought £2 a point (£2/pt) on the BA Rolling Daily market at 121p with a stop loss at 114, just below the recent low on the chart (risk £14). I like to buy in with a low stake.
• By mid-afternoon, news about the bond issue was flying around (sorry) and the shares started to move up strongly. So I bought a new position in the BA Rolling Daily market: £2/pt at 126, with a tight stop loss at 121, doubling up my risk but protecting against downside.
• The following day, the shares opened higher but pulled back. So I left the position alone, except that I moved the stops on both trades slightly above their entry points, protecting my capital.
• On Thursday 16th, increasingly confident that my ‘Balls of Steel’ call was working, as the wider market was moving so fast, I made the quick decision to add another £5/pt at 128. I moved the stops on all positions to 127 when the trade worked, locking in 6 pts of profit = £24.
• On the morning of the 17th, the news about the bond issue being completed hit the market. BA stock gapped up. I closed out my £5/pt trade from 128 at 139.5p. 11.5 X £5= £57.50 cash in the bank.
• I left the £2/pt long from 121 running ( with a stop at 128): 7 pts protected profit. And I kept the £2/pt from 126 (stoploss 133) 7 pts protected profit = another £56 pretty secure in total.

Realised profit on the trade = £60
Current unrealised profit (with the price at 1.36) = £50

I’ve averaged up my entry point to 123p and I’ve ensured that I’ve got some room for volatility. And most appealingly, I’ve now got a low risk long equity position in place, with an entry point 9% below where the shares are currently trading, with no funds needed for a deposit. The only costs are the financing costs for the position – about 5p a day. If BA heads on up to 170p or higher I stand to make much more. So there is potential for considerable upside if the bullrun in this stock continues (which I have to say I’m a bit doubtful about). But if it does break out higher then I might add some more risk.

It’s important to remember that stop losses on paddypowertrader aren’t guaranteed, so if something terrible happened and the British Airways share price gapped down through the floor of my trade, I could still lose money. But with relatively small stakes, and plenty of profit elsewhere, I’m happy to run it.

Now you could argue that I could have achieved the same profit just by buying £10/pt at around 125p. But had the trade moved against me I’d have stood to lose a chunk of cash very fast. And no-one has a crystal ball; we just don’t know where prices might move. So I prefer to scale in.

I tend to go through much the same process with all of my equity trades which helps me stay relaxed when I’m out and about.

And For Some Light Relief – Obama Decides To Scale Back:

Obama Drastically Scales Back Goals For America After Visiting Denny’s