ScaleTrader – Pairs Trading using the Profit Taker

ScaleTrader is a sophisticated trading algorithm within Interactive Brokers’ platform that helps traders scale into large positions efficiently. The essence behind the algorithm is that it allows investors to buy at decreasingly lower prices or sell at increasingly higher prices. ScaleTrader can be used to buy or sell positions in single instruments, pair trades, or combinations. Investors can use ScaleTrader to trade Stocks, ETFs, Options, Futures, FOPs, Currencies, Bonds, and Warrants.

In this example, the investor will use ScaleTrader to create an order to buy shares in General Motors and sell Ford shares as the price differential between the two changes, then use the Profit Orders feature to submit profit taking orders based on the filled components.

An investor may decide that the fortunes of two competing companies, as portrayed by their respective market capitalizations, are about to change. The basic idea is that the share price of Company A will outpace that of Company B over time. The investor may position for such a move by buying shares in Company A while at the same time selling shares in Company B. Such moves might occur following a period of underperformance by Company A relative to either the broad market or to its industry peers. It could be the result of management change or the release of a new product. Such under or out performance may happen rapidly or slowly over time. Investors could design pairs positions with the intention of profiting from such relative performance in mind.

In the following example, shares of General Motors are more expensive than those of Ford by a factor of fivefold. As we set up the trade in ScaleTrader, we need to allow for that factor.

ScaleTrader can be accessed in Mosaic by clicking on the New Window button, scrolling down to More Advanced Tools, and selecting ScaleTrader. Once the ScaleTrader window appears, the investor will click on the Pairs tab and click on “Edit Pair” on the upper right-hand side. First the investor fills in the Buy side underlying with GM and selects stock; next, they type in F and select stock in the sell side underlying.

The investor then selects the pricing method:

• Net Amount which defines the total monetary value of the trade and is calculated by the sum of all transaction amounts. The pair price is based on the currency value of the trade.
• Price Difference which defines the spread between the two securities prices and is calculated by the absolute difference between the securities prices. The pair price is calculated by the price spread of the underlyings.

In this scenario, the investor is going to use the select net amount, click on create the pair. It’s important to note that the combo can only be executed as non-guaranteed. As noted earlier General Motor’s price is roughly five times that of Ford’s, so the investor adjusts the component size accordingly, first they put in one for GM and 5 for Ford to show the difference in the ratio. However, using this for the actual component is not practical since it would be submitting very small trades, so they change GM to 100 and Ford to 500. Notice that the chart has updated to reflect this multiplier.

Next, the investor inputs the maximum position that they are willing to trade. They enter 10,000 for GM and the Ford position automatically updates to 50,000 to keep the ratio constant. The investor can select the starting price either by typing it in or selecting a spot on the chart, and a blue line will appear to mark it. Since this is a buy order the top price automatically updates to match the starting price since that is the highest price that the ScaleTrader will submit for purchase. In this scenario it is showing negative $495, indicating that the investor will take in a credit when they sell five hundred Ford shares and purchase 100 GM shares. They can then either move the green line to the bottom price and ScaleTrader will calculate the price increment or enter a price increment and ScaleTrader will calculate the bottom price. They choose to use 50 cents for the increment, and the bottom price is calculated, in this case $544.50 credit for the pair. For more information on the order setup the investor can look at the Summary in bottom center of the screen which shows the number of price levels, average price, the total dollar amount of the order, and the range of the order in dollar and percentage terms.

The investor chooses the order type, Limit and Market, which submits one or both sides as a limit order and once the first leg is filled, the second is submitted as a market order. The investor sets the Time in Force to GTC by clicking on the TIF tab and selecting GTC from the drop-down menu. Once done, click back on the Scale Tab.

The next section is the Auto price adjustment section where ScaleTrader automatically modifies the order over time. For more information on this feature please see the video, “ScaleTrader – Pairs Trading”.

The investor can also use the Profit Orders feature to take advantage of market moves and lock in a profit if the market moves in the desired direction. The investor clicks on the box next to Create profit taking order and enters one dollar into the box next to Profit Offset. With this feature enacted ScaleTrader will create a sell order for 1 dollar above the filled buy order in an effort to lock in a one-dollar profit. This pattern will continue for each buy order submitted. The investor can also choose to restore the size after taking profit. If selected this will cancel the current scaled incremental order and send a buy order with the same price as the component that was closed out for a profit.

The Restart Scale Trader feature is only available if the investor is using the profit-taking and restore size instructions. The Restart instruction is designed to help the investor resume a cancelled or busted ScaleTrader order, starting from the point at which the scaled sequence left off. A busted scale order results in a lost connection between the scale and profit order processes, leaving only two independent scaled orders. For more information on this feature please visit the ScaleTrader user guide: https://www.ibkrguides.com/traderworkstation/example-5-restart-scale-trader.htm

When ready, the investor clicks on the Transmit button at the bottom of the screen and an Order Confirmation window appears. Once they review, they can click on Transmit and ScaleTrader is activated. The order will be displayed in the Activity panel, and ScaleTrader specific data columns may be added by clicking on the gear icon and selecting, Choose from Initial Component Size, Scale Increase, Scale Profit Offset, Scale Progress, and Subsequent Completion Size.

ScaleTrader’s pair trading functionality allows the investor to execute simultaneous trades in two correlated securities, automatically buying one stock while selling another at predefined price differences. All stock-stock pair combinations must be traded as non-guaranteed orders, and the scale chart displays the price difference between the two contracts over time, helping the investor monitor and adjust their pair trading strategy.

ScaleTrader’s profit taker automatically submits sell orders at specified profit levels when the investor’s buy components fill, allowing systematic profit capture while maintaining their scaling strategy. The feature can be configured to either execute once per price level or continuously restoring size after taking profit, enabling flexible position management based on the investor’s trading objectives.