Part 5 Money Management – Trade Splitting

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Scaling In and Scaling Out in Forex

Hello Forex Traders,

Today’s article focuses on scaling in and scaling out in forex. This money and trade management technique is a sophisticated method to keep losses small and make bigger profits. In other words, it is not important how many times a Forex trader wins or loses. But, instead, it matters how much a trader gains with profitable trades versus how much is lost with losing trades.

When using the scaling in and out technique, a Forex trader adheres to this principle and maximizes the potential earnings. Money management, however, is not the only important element within trading. The Forex trader must be proficient in other parts in order to thrive and profit:

OPTIONS FOR SCALING IN AND SCALING OUT

There are many variations on how a Forex trader could scale in and scale-out. Let us examine them.

The scaling in money management technique means the Forex trader decides to open multiple positions at (predetermined) different price levels. In the standard situation, a Forex trader makes one trade. However, when scaling in, a Forex trader divides the entries into multiple parts.

The entries can be added at various spots. The Forex trader can always make these choices:

  • Trade immediately
  • Trade upon break out
  • Trade upon pullback

With scaling in, the trading decision tree becomes this:

  • Trade immediately, scale in with pullback and/or upon break out, etc.
  • Trade upon a breakout, scale in with pullback and/or 2nd breakout, etc.
  • Trade upon pull back, scale in upon breakout and/or 2nd pullback, etc.

Of course, upon each pullback and/or breakout, the Forex trader can decide to split multiple positions as well. During a phase where the price is retracing back to the Fibonacci retracement tool, a Forex trader can decide to place entries at both the 50% and 61.8% Fibs.

The multiple entries can be implemented using various patterns, tools, indicators, or a combination of them. It is not in the scope of this article to discuss the Forex strategy in detail. Here is an example of a master candle setup.

The SCALING OUT money management technique means that the Forex trader decides to exit individual positions at (predetermined) different price levels. In the standard situation, a Forex trader exits the trade at one spot. When scaling in, a Forex trader divides the exits into multiple parts. Such as a mix of actual take profit levels, soft profit zones and/or trail stops.

This scaling out technique is valid for the stop loss placement, the take profit placement, and the trail stop method. A Forex trader can choose to have part of the position with a tight stop loss, and the other part with a loose stop loss. A Forex can also choose to have part of the position with a wide take profit and the other part with a tight take profit. The trader must ensure the entire trade, and all individual trades, meet a sufficient reward to risk balance. The options for scaling out could mushroom and balloon quickly.

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To give an EXAMPLE: many Forex traders feel uncomfortable when in profit as they do not want to give back the profit. Forex traders could use a trail stop to safeguard the trade from big swings. But the other method could also be to split the scale-out in 2 and take profit on 1 half at 1:1 reward to risk, leaving the stop loss at the original spot for the 2 nd part and aiming for a higher take profit for the 2 nd part. This way the risk is also reduced to zero upon price hitting the first target, but allows for another part to aim higher. In fact, both methods are good and it depends on each trading personality as well from FX trader to FX trader and from strategy to strategy which of the 2 could make more sense. They both achieve the same goal: money management helps profitability and trading psychology with implementation.

  1. Both techniques must not be used simultaneously! A Forex trader could scale in BUT use the same profit taking level. A Forex trader could also enter the trade at the same price level BUT use a scaling out a technique to exit the trade.
  2. The techniques could vary during the trading plan. A planned breakout scale-in could be canceled (when stated in a trading plan under which conditions). A planned trade exit could be changed at a certain spot (when for instance mentioned in the trading plan that trail stop will be used above 50 pips profit, etc). Also, read about the Trail Stop Loss in Forex.

ADVANTAGES OF SCALING IN AND OUT

Some of the advantages of scaling in and out include:

  • Keeping losses small when losing.
  • Allowing wins to be big when winning.
  • Having a better average price, hence a bigger position size.
  • Potentially making a profit by scaling out, and then scaling back in again on a pullback for instance.
  • Having a trading plan that allows for flexibility in its engagement with the market.
  • The technique enhances potential profitability and reduces overall risk.

DISADVANTAGES OF SCALING IN AND OUT

Some of the disadvantages of scaling in and out are the following:

  1. The trade management is (more) complex and requires (more) time and attention.
  2. Using this technique at incorrect times and outside of the trading plan should at all costs be avoided.
  3. Forex trading needs to very secure to ensure the correct implementation of the process.
  4. In cases where not all entries are trigged, winning trades could win small and losing trades could lose more.

IMPLEMENTATION

The actual implementation of this technique certainly needs practice. Like everything else in life, the only way to master a skill is by practicing over and over again. The best method to learn is to do so via a mentor.

In our Forex trading room at Trading Strategy Guides, we implement a strategy named the “Double Trend Trap” Strategy that has 2 different methods: a breakout strategy (named strike) and a pullback strategy (named boomerang).

By implementing the strike and boomerang, a Forex trader automatically scales in and out by just following the rules and guidelines of the Double Trend Trap (DTT for short). Having those set rules and guidelines greatly help with easing the process of learning how to use this money management technique. Read more here about the advantages of a live trading room. And click here to join the trading room.

THE RULES

Some Forex traders might wonder: isn’t adding to a losing position incorrect? The answer is a definite YES if the add-on occurs as a spur of the moment decision. In this scenario, the Forex trader is adding risk to the open and exposed position. If, however, the scale-in is preplanned and the new trade positions are part of the overall trading plan, then this technique is fine.

In this case, the overall risk does not increase by adding a position. The Forex trader does need to follow this process through:

  1. Forex trader chooses risk % for the entire trade
  2. Forex traders decide how many positions entire trade will have
  3. Forex traders choose an entry, stop loss and take profit mechanism for all positions
  4. Forex trader splits total risk among the number of positions
  5. Forex trader calculates position size for each position of trade
  • Forex trader takes a 1% risk
  • Decides for 3 positions
  1. 1 position at 50% Fibonacci retracement pull back, SL bottom/top, TP -618
  2. 1 position at 61.8% Fibonacci retracement pull back, SL bottom/top, TP -618
  3. 1 position at 78.6% Fibonacci retracement pull back, SL bottom/top, TP -618

Risks the total of 1% among the 3 positions:

  1. Forex trader risks 0.2% at the 50% Fib
  2. Forex trader risks 0.35% at the 61.8% Fib
  3. Forex trader risks 0.45% at the 78.6% Fib

Forex trader calculates positions size

  1. In this case, the 50% Fib has the least risk and the widest stop loss, so the position size will be smaller in this case. The 78.6% has the biggest risk % and tightest position size so it will have the biggest position size.

Basic premise: as long as the concepts used are well tested, pre-planned and part of the trading plan, then the scaling in and out technique can be a very useful element within Forex trading.

Do you use scaling in and scaling out? If yes why? If not, why not? What is your experience with this money and trade management technique?

Thank you for reading!

Please leave a comment below if you have any questions about Scaling in and Scaling out in Forex!

Also, please give this topic a 5 star if you enjoyed it!

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Company Taxation Manual

Corporation Tax: company reconstructions: transfers of trade

CTA10/S940B (2) & CTA10/S951 (8)

For CTA10/S940A to apply there must be a transfer of either a trade or part of a trade between the companies concerned. CTA10/S940B (2), as extended by CTA10/S951, covers four situations as follows:

  1. A company ceases to carry on a trade and another company begins to carry it on.
  2. A company ceases to carry on a trade and another begins to carry on the activities of that trade as part of its trade.
  3. A company ceases to carry on partof a trade and another company begins to carry on the activities of that part as its trade.
  4. A company ceases to carry on part of a trade and another company begins to carry on the activities of that part as part of its trade.

The scope of CTA10/S940B (2) and CTA10/S951 was discussed in Falmer Jeans Ltd v Rodin (1990) 63TC55.

CTA10/S940A may also apply where:

  • a company ceases to carry on a trade,
  • thereafter another company carries on part of that trade either as its trade or as part of its trade.

Succession

CTA10/S940B (2) applies in the first situation above. This is where a company ceases to carry on a trade and another company begins to carry it on. For a transfer of a trade to fall within this first category there mustbe succession to the trade. There is guidance on succession at BIM80620+.

There is succession, and (in this respect) CTA10/S940B (2) is satisfied, when the purchaser takes over enough of the vendor’s trading activities for it to be established that the purchaser is carrying on the same trade. This is shown by:

  • the ‘substance’ view of succession in Malayalam Plantations Ltd v Clark (1935) 19TC314, and
  • the approach of looking at the realities of the situation inWadsworth Morton Ltd v Jenkinson (1967) 43TC479, a case which concerned the IT ancestor of Section 940A (FA53/S19 and FA54/S17).

Succession can also occur when the purchaser merges the transferred trade with an existing trade of its own. provided that the trading activities formerly carried on by the vendor are still being carried on in an identifiable form as in Briton Ferry Steel Co Ltd v Barry (1939) 23TC414.

Activities of a trade

CTA10/S951(1) applies in the second situation above. This is where:

  • a company ceases to carry on a trade,
  • another company begins to carry on the activities of that trade as partof its trade.

It was decided in the Falmer Jeans case that this second category covers cases where the trade was transferred but the ‘identifiable form’ test was not met. In the case of Laycock v Freeman, Hardy and Willis Ltd (1938) 22TC288 the ‘identifiable form’ test was not met. It is not necessary that the purchaser carries on all the activities.

CTA10/S951 (3) applies if:

  • enough activities are taken over to form a separate trade,
  • if the purchaser treats those activities as a separate trade, they are in factthe same trade the vendor formerly carried on.

Activities of a part of a trade

CTA10/S951 also applies in the third and fourth situations above. These third and fourth categories are required because there cannot be succession to part of a trade (BIM70640). The conditions of CTA10/S940A are not satisfied where mere assets or activities that do not amount to part of a trade are transferred.

There is no definition of ‘part of a trade’ in the Act. But it can be regarded as a severable part of a company’s trading activity that is capable of:

  • being a free-standing apparatus,
  • making profits or losses in its own right.

It does not have to amount to anything as distinctive as a branch or division.

Money Management

What Is Money Management?

Money management is the process of budgeting, saving, investing, spending or otherwise overseeing the capital usage of an individual or group. The predominant use of the phrase in financial markets is that of an investment professional making investment decisions for large pools of funds, such as mutual funds or pension plans. Money management can also be referred to more narrowly as “investment management” and “portfolio management.”

The Basics of Money Management

Money management is a broad term that involves and incorporates services and solutions across the entire investment industry. In the market, consumers have access to a wide range of resources and applications that allow them to individually manage nearly every aspect of their personal finances. As investors’ increase their net worth they also often seek the services of financial advisors for professional money management. Financial advisors are typically associated with private banking and brokerage services, offering support for holistic money management plans that can involve estate planning, retirement and more.

Investment company money management is also a central aspect of the investment industry overall. Investment company money management offers individual consumers investment fund options that encompass all investable asset classes in the financial market. Investment company money managers also support the capital management of institutional clients, with investment solutions for institutional retirement plans, endowments, foundations and more.

In the growing financial technology market, personal finance apps exist to help consumers with nearly every aspect of their personal finances.

Key Takeaways

  • Money management broadly refers to the process of budgeting, investing, saving, and spending with one’s finances.
  • Financial advisors and personal finance apps are increasingly common in helping individuals manage their money better.
  • Sometimes money management refers more narrowly to investment or portfolio management.

Top Money Managers by Assets

Global investment managers offer retail and institutional investment management funds and services that encompass every investment asset class in the industry. Two of the most popular types of funds include actively managed funds and passively managed funds replicating specified indexes with low management fees.

The list below shows the top 5 global money managers by assets under management ($M) as of Q1 2020:

The Vanguard Group

The Vanguard Group is one of the most well-known investment management companies, catering to over 20 million clients across 170 countries. Vanguard was founded by John C. Bogle in 1975, in Valley Forge, Pennsylvania, as a division of Wellington Management Company, where Bogle was previously chairman. Since its launch, Vanguard has grown its total assets to $5.1 trillion as of October 2020. Of its 388 funds, 180 are U.S. funds, including the popular 500 Index and Total Stock Market funds.

Pacific Investment Management Company, LLC

Global asset management firm Pacific Investment Management Company LLC (PIMCO) was co-founded in 1971, in Newport Beach, California, by bond king Bill Gross. Since inception, PIMCO has grown its assets under management (AUM) to $1.77 trillion as of October 2020. The firm houses over 775 investment professionals, each averaging 14 years of investment experience. With over 100 funds under its banner, PIMCO is widely regarded as a leader in the fixed income sector.

BlackRock, Inc.

In 1988, BlackRock Inc. (BLK) was launched as a $1 division of the BlackRock Group. By the end of 1993, it boasted $17 billion in AUM. By October of 2020, that number swelled to a whopping $6.32 trillion, making BlackRock the world’s largest investment management firm, with over 12,000 employees, in 70 offices, across 30 countries. BlackRock’s ETF division, called iShares, has approximately $1.6 trillion in AUM globally, which amounts to 27% of the group’s total assets.

Fidelity Investments

Fidelity Management & Research Company was founded in 1946 by Edward C. Johnson II. As of October 2020, Fidelity had 24 million customers with $6.9 trillion in combined assets. The firm offers 386 mutual funds, including domestic equity, foreign equity, sector-specific, fixed-income, index, money market, and asset allocation funds.

Invesco Ltd.

Invesco Ltd. (IVZ) has been offering investment management services since the 1940s. In August of 2020, the firm announced that it had $987.8 billion in AUM, across its 100-plus mutual fund products. The firm offers over 100 ETFs through its Invesco Capital Management LLC division. In 2020, the company saw some decline in AUM. But despite the resulting dip in its stock price, Invesco remains one of the world’s top asset management firms.

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