In my quest to become a better trader, I get to talk to traders at different stages of their journey.
The beginners tend to talk about (and seek) the ‘strategy’ or ‘setup’ that makes money, and nothing more. And this is normal, as that is the depth of beginner traders’ understanding towards the craft of trading.
The really good traders (or at least the ones that show potential), tend to have a more in-depth perspective about trading. Aside from strategies, they tend also talk about aspects like:
Money/risk management, and
Execution styles
In other words, there is more to trading than just the ‘perfect’ strategy. There are more aspects to consider and develop if a trader is committed to thrive in this journey.
In this post, I want to talk about different execution styles that a trader should consider while trying to develop edge, as well as their respective pros and cons.
Overview: 3 main execution styles
There are 3 main execution styles that I have personally explored in my own trading, namely:
All-In-All-Out (AIAO)
All-In-Scale-Out (AISO)
Pyramiding/Scaling-In
Which execution style should you use?
My short answer: There is no one perfect execution style, and you should find out which style is the best for your own trading approach.
However, continue reading as I will do my best to share my thoughts on which execution style would be a better fit according to different trading approaches.
#1 All-In-All-Out (AIAO)
AIAO execution style is perhaps the simplest and most commonly-taught execution style that most traders practice in their trading.
Generally, AIAO style implies that a trader would put on 100% of the risk (in % or $) that they are willing to risk per trade in their initial and only execution.
As an example, if my risk-per-trade is 1% of my capital, then I will risk the full 1% in my execution of a particular trade – and that’s it.
Upsides of AIAO:
Easy to understand, execute and manage. Especially beginner-friendly.
Risk-reward of a trade is straightforward and easy to calculate.
Downsides of AIAO:
AIAO execution is more rigid as traders do not have the space/flexibility to get more out of their trades, such as targeting different profit areas, as well as adding on winning trades.
For who:
AIAO execution style is suitable for beginner traders learning how to trade thanks to its simple-to-understand approach.
Trading system with a good balance of hit rate and Risk-Reward. For instance, an AIAO execution style with about 40% hit rate AND an average of 1:2 Risk-Reward ratio is a profitable trading system in the long run.
Tips for AIAO traders:
Already profitable AIAO execution style traders could consider implementing a more advanced style, such as scaling in (ie. Adding size) on winning trades.
#2 All-In-Scale-Out (AISO)
An AISO execution style is also a popular execution style among traders.
Similar to the previous AIAO style, AISO traders would also put on 100% of the risk (in % or $) that they are willing to risk per trade in their initial and only execution. The difference, is that the trader will scale out (a.k.a. Closing part of the trade) to secure profits as the trade develops.
Upsides of AISO:
A more flexible execution style as AISO traders are able to lock in profits as their trades develop.
AISO traders can target multiple profit areas instead of a single profit goal on AIAO execution.
Downsides of AISO:
AISO execution style will require traders to trade more than 1 contract/position in order for them to scale out as trade develops. In futures trading, this will mean a larger margin requirement for a trader, hence not suitable for traders with limited capital.
Additional skillsets, such as determining different profit target areas for scaling out are required for AISO traders. As such, this is not suitable for novice traders that are still fresh to trading.
Full risk, less profits (for certain cases). Less experienced traders that attempt to do AISO may also take on full risk for less profit. For instance, an AISO trader may trade 2 futures contracts at 5-points risk. Then, he scales out his first position at 2.5 points and the second contract at 5 points, resulting in a total profit of 7.5 points (1 contract x 2.5 pts + 1 contract x 5 pts). On the other hand, an AIAO trader would just take off his full positions at 5 points, resulting in a profit of 10 points (2 contracts x 5 pts). In other words, an AISO trader will need to give extra consideration on how to scale out at a favorable risk-reward.
Mental challenges: A less experience AISO trader also has the risk of succumbing to the urge to scale out of a trade and secure profits due to the fear of losing, NOT because that is PART of the trading rule.
For who:
Traders that can identify multiple target profit areas with excellent risk-reward.
Tips:
Form a clear, mechanical rule around when to scale-out.
#3 Pyramiding/Scaling-in
Pyramiding, or scaling-in is, from my observation, a less-practiced and advanced execution style, yet can be extremely rewarding if done right.
Generally, pyramiding or scaling-in implies that a trader add-on additional positions (or stakes) to a winning trade.
There is no one way to pyramid a trade and different traders do it differently.
For instance, some traders (like myself) may decide to start with a small position, and add on size as a trade develops in their favour. On the other hand, some traders may pyramid with the same size as the trade develops in their favour.
Upsides of pyramiding/scaling in:
In my opinion, pyramiding in a trade resembles the game of poker the most, as poker players tend to also add to their stakes as more cards are dealt in their favour during the game.
In other words, traders that pyramid in their trades can maximize their gains when things are in their favour, and keep their risk low when the trading condition is not supportive (ie. Not adding to trades).
No need to rely as heavily on an accurate initial hit rate. This means traders do not have to be correct too often in their initial execution, as they will make a lot more from adding to their winning trades.
Downsides of pyramiding/scaling in
Pyramiding is a more advanced execution style as there are more moving parts to manage in a single trade. Several key aspects to consider include:
(i) Rules/conditions on when to add size.
(ii) Risk management approach:
Do you bring the Stop-Loss of the initial position to BE? Or are you going to trail it?
Are you going to manage the Stop-Loss of new positions? Are you going to trail or fixed it?
Mentally draining: As you can see from the above, there are a lot of decisions to make while pyramiding in a trade, which can be overwhelming for less-experienced traders.
For who
Traders with a poorer initial hit rate can consider pyramiding to capitalize and make more from the winning trades.
AIAO traders that want to get more out of their edge.
Tips:
Develop clear execution and risk management rules on when to add size to a trade.
Verdict: Explore different execution styles to discover/maximize your edge
As traders, it is crucial for us to continue exploring different aspects of our trading that could be improved, be it to adapt to the market or to expand our edge.
Execution styles, in my opinion, is a less-talked-about aspect in trading that more traders can definitely put more attention in to bring their trading to the next level.
If you are reading, what's your current execution style and are you planning to try out other styles? Let me know in the comment section below!
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Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced purely for sharing purposes and should not be taken as a buy/sell recommendation. Past return is not indicative of future performance. Please seek advice from a licensed financial planner before making any financial decisions.
Leverage is a financial tool that comes with its advantages and risks. Please learn and understand both the upsides and downsides of leverage before using it for trading.
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