Scale Trading

Scale trading (also known as "interval trading") uses common price oscillations in a pre-defined range or "scale" to formulate trades. This approach to trading maps out when to buy and when to sell certain commodities trading in the lower end of their historical trading range, preferably at or below the cost of production or close to previous major turning points. Since financial assets such as currencies, bonds and stock indices do not have a "cost of production" and can be subject to devaluation (or crashes); it is highly advisable to avoid scale trading paper assets. In other words, with scale trading, we are interested in trading "tangible" commodities.

For example, it becomes more difficult for prices to drop as they approach zero. Ask yourself this, "is it easier for sugar prices to move from 12 cents to 6 cents, or 6 cents to zero?" Each move represents 6 cents, however, common sense says that we will never see sugar being given away for free! Before prices hit zero, sugar producers will be forced to close down, and as supplies shrink, prices will tend to rise in order to ration demand. The opposite is true when prices hit the upper end of historical price ranges. More producers enter the market to take advantage of fat profit margins until supplies sufficiently meet demand and prices recede again. As a result, commodity prices are always seeking price equilibrium within a relative range based upon the forces of supply and demand.

It is important to realize that scale trading does not utilize "stop" orders. Instead of exiting the market as prices drop, the scale trader systematically continues trading according to plan. As with any trading plan, there are hazards to scale trading: limit moves, contract rollovers, non-oscillating markets, or under-funded accounts can be roadblocks to a successful scale.

Capital requirements vary according to your individual scale trading plans and the particular market chosen to trade. However, it is possible to open a scale trading account with as little as $10,000. Altavest brokers are skilled in identifying scale trading opportunities as well as calculating trading capital requirements for individual trading plans based on "what if" scenarios. Scale trading is one of many approaches to trading and may not be suitable for everyone. For a free consultation about scale trading and other "custom" trading plans, call us today at 800.994.9566.

Scale Trading - A Systematic Approach

  1. Find a market that you wish to begin scale trading by comparing its current price to its historical price range over the last ten to twenty years. For those of you who are new to scale trading, we recommend consulting with an Altavest broker for guidance. Select a buying scale that allows you to buy futures contracts at price intervals all the way down to your lowest anticipated price and still have plenty of money left in reserve. Use our Scale Trade Calculator or consult your broker to determine necessary capital requirements.
  2. Select a selling scale to liquidate accumulated contracts (refer to the example below.)
  3. Once you have decided upon a scale and are confident that you have the necessary funds to maintain your scale, simply call your Altavest broker to implement your plan.
  4. Now do nothing. Watch the price move up and down your scale. As prices fall, you would accumulate contracts when your buy orders are filled. As prices rally, you would sell off the contracts that you have accumulated. As each contract is sold, you would reinstate your buy orders according to your scale.

Hypothetical Example: The Mechanics of a Scale Trade

On day 1 you decide (after reviewing your historical charts and consulting with your broker) to start a 30-point scale trade for sugar starting at 880. This means that you will buy 1 contract every 30 points below 880, i.e. 850, 820, 790 etc. You also decide to place orders to sell a contract 30 points above each one you bought. On day 17 you buy your first contract at 880 and place a profit taking order at 910 and a second buy at 850. From this point if the market goes up, you take a profit. If the market goes down, you buy additional contracts according to your scale. In our example trades would occur in the following sequence:

Day
Buy
Sell
Day
Buy
Sell
17
880
48
790
22
9101
50
760
36
880
51
790
37
850
52
820
43
820
58
850
46
790
59
880
47
760
60
9102

1 No more contracts left in inventory, but you reinstate your buy order at 880 to continue the scale.
2 No more contracts left in inventory.

If you match up each buy and sell according to last-in first-out (LIFO), you will note a profit on all 7 trades, totaling 210 points, minus transaction costs (if you are not familiar with LIFO, please call your broker for an explanation). After day 60, if you left the scale "open" for sugar, you would continue to buy and sell if sugar moves back down and then up your scale.