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 949.488.0545.
Scale Trading - A Systematic Approach
- 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.
- Select a selling scale to liquidate accumulated contracts (refer to the example
below.)
- 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.
- 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.