Step-by-Step Position Entry Strategy: Advantages and Disadvantages
1. Mechanics of the Step Strategy
Principle of Operation
The step strategy involves placing a series of pending orders to buy or sell at predefined levels. In an upward movement, the trader places the first order at market price, and subsequent ones below the current price, creating several "steps." This allows for averaging the entry price during pullbacks.
Key Parameters
The optimal number of levels is between 3 and 6. The distance between levels is calculated based on volatility, such as 0.5-1 ATR. The volumes of orders can be equal or increasing as they move away from the price.
Advantages of Averaging
During a pullback, the step strategy lowers the average entry price and allows for a position entry with reduced risk. This is effective in range-bound markets and during moderate corrections in trends.
2. Averaging: Step vs Alternatives
Comparison with Martingale
Unlike the Martingale strategy, where volumes are increased after losses, the step strategy fixes overall risk and the number of orders in advance, making drawdowns predictable and manageable.
Pyramiding vs Step Strategy
Pyramiding adds to a position when the market moves in your favor, while the step strategy averages the price in case of a pullback. Each method is beneficial under different market conditions: pyramiding in a strong trend and the step strategy in ranges.
Parameter Optimization
Utilizing dynamic level calculations through the ATR indicator and adapting volumes based on current volatility can enhance the method's effectiveness. For instance, increasing the distance between levels when ATR rises and decreasing it when ATR falls.
3. Risk Management
Calculating Stop Loss
The stop loss is set beyond the outer level of the step strategy: with four orders, the total risk equates to the sum of risks from each order and should not exceed 1-2% of the account balance.
Volume Distribution
The volume of each order is calculated such that, upon triggering the stop loss, the total loss corresponds to the predefined risk limit.
Dynamic Adjustment
During the course of trading, the trader may adjust levels if market conditions change, but no more than once until the stop loss is triggered, to maintain control over risk.
4. Costs and Expenses
Commissions and Spreads
Each order incurs a commission and spread. With four entry levels, expenses can reach up to 0.1-0.2% of the account balance, diminishing final profits.
Slippage
During periods of high volatility, some orders may trigger at worse prices. It's important to consider the expected slippage when calculating levels.
Reducing Costs
Trading during medium volatility periods and choosing a broker with optimal conditions can help minimize costs. Utilizing liquidity aggregators and direct market orders reduces spreads and slippage.
5. Psychology and Discipline
Emotional Stability
The step strategy requires readiness to accept the loss of the entire order series if the market turns against you. Keeping an emotion journal assists in analyzing behavior and avoiding impulsive actions.
Emotional Control
Employing meditation and breathing techniques before trading helps maintain a clear mindset and strictly adhere to the rules of the strategy.
Psychological Traps
Traders often succumb to the urge to add new levels outside of the strategy. It is essential to document the plan in advance and not deviate from it under emotional pressure.
6. Adaptation to Market Conditions
Trend vs. Range
In trends with pullbacks of up to 1-2 ATR, the step strategy effectively averages the price. In sideways markets with clear support and resistance levels, the strategy captures pullbacks.
Force Majeure Events
During important news releases and strong gaps, pending orders might trigger at extreme prices. It is advisable to disable the strategy or reduce the number of levels during periods of volatile news.
Liquidity
In less liquid instruments, the step strategy may lead to significant slippage. It is preferable to focus on major currency pairs and large-cap stocks.
7. Step-by-Step Setup
Step 1: Determine ATR
Calculate ATR(14) for the asset and set the step between levels in the range of 0.5-1 ATR.
Step 2: Choose the Number of Levels
Limit the number of orders to between 3 and 6 to avoid overloading the account.
Step 3: Automate Order Placement
Use scripts and trading terminals that allow for bulk placement of pending orders at pre-calculated prices.
Step 4: Monitor and Adjust
Monitor execution and make adjustments if necessary, ensuring to limit modifications to one per trade to avoid emotional decisions.
8. Examples and Case Studies
Successful Case
Trading EUR/USD: four levels spaced 25 pips apart, stop loss at 100 pips, take profit at 200 pips. With a total risk of 0.5% of the account, the strategy yielded a profit of 1%. The main profit was realized after the third step triggered.
Unsuccessful Case
Shorting technology stocks during a news gap: due to slippage and an expanded spread, the total loss exceeded 3% of the account, surpassing the acceptable risk.
Historical Example
In the gold market in 2020, during periods of high volatility, some traders implemented the step strategy with a reduced distance of 0.3 ATR and limited the number of levels to three, which lowered drawdown by 40% compared to the classical scheme.
Conclusion
The step entry strategy is a powerful tool for position management and price averaging but requires strict risk management, cost control, and psychological resilience. Adapting parameters to volatility and market conditions enhances the strategy's effectiveness and reduces the likelihood of significant losses.
