Scaling By Ken Hodor 10/14/10

Five Fundamental Trading Truths Anything can happen You don’t need to know what is going to happen next in order to make money. There is a random distribution between wins and losses for any given set of variables that define an edge. An edge is nothing more than an indication of higher probability of one thing happening over another Every moment in the market is unique From: Trading in the Zone by Mark Douglas

Use Signal to Go All In This is arrogance—no one knows the future No one knows what will happen next

Scaling Market is going up Market is going sideways Increase position in what is working Market is going sideways Long when near bottom of range Sell or sell short at top of range Market is going down slightly Still in major up trend buy more down to bottom of channel Market is going down quickly Increase short position as it is working

Scale Market Moving Up

Scale Market Moving Down

Scale Market moving Sideways

Tranche size Fixed tranche size Variable tranche size Use 25% on each tranche 4 possible tranches per instrument Variable tranche size More sophisticated and more profitable Vary size based on distance to 2-standard error bands about a linear regression channel

Conclusion Using scaling you do not have to always be right…on average you are indeed right.