How do you scale-in and why?

[fader]

i am working on adding a scaling-in component to my entries.

in my approach, i define a starting point and an ending point of scaling-in and a rate of scaling-in between these points.

based on an arithmetic solution applied to my trading strategy, it appears that an optimal rate of scaling-in is proportional - i.e. at the starting point, the position is 0% and at the ending point the position should be at 100%, so at 50% i should have one-half of the position on.

i have heard and read people say: "i put on half now and half X points higher/lower" or "i put on a small piece now and scale-in the rest at better prices later"... - while that is interesting, i am more interested to know why you scale-in the way you do, what is the rationale?

also, any recommendations for relevant books or other material on the subject would be appreciated.

 

[Paccc]

The best way to scale in depends on your strategy. For example, if you had a reversal system, you might want to buy 25% of your position initially if you think the price is about to reverse. Once the price finally reverses, you can put on the rest of your position at a more favorable price. An advantage of doing this is that if you're right about the upcoming reversal, you'll have 75% of your position near the bottom, whereas if you're wrong, and the price never reverses, your risk was only a fourth of what you normally have. It is a way to keep your losses small when you're wrong, and make your winners larger by only adding to them when you've gotten confirmation. Of course, the best % size to start with and the number of times you scale-in is up to you to determine whats best for your particular strategy.

-- Paccc

 

[HGTrader]

Keep in mind that scalling in has an equivalent: of buying the entire lot at a specific price.

Example: if you
Buy 100 shares at $11
Buy 100 shares at $12
and Buy a final 100 shares at $13
is the equivalent of buying 300 shares at $12

 

[fader]

Quote from Paccc:

For example, if you had a reversal system, you might want to buy 25% of your position initially if you think the price is about to reverse. Once the price finally reverses, you can put on the rest of your position at a more favorable price.

i don't quite understand - how can i get a more favorable price once it has reversed? - the point of scaling-in is to buy as the price is coming down (as per your example), not once it has reversed...

 

[fader]

Quote from HGTrader:

Keep in mind that scalling in has an equivalent: of buying the entire lot at a specific price.

Example: if you
Buy 100 shares at $11
Buy 100 shares at $12
and Buy a final 100 shares at $13
is the equivalent of buying 300 shares at $12

while your point appears arithmetically logical, the reason for scaling-in is that you don't know exactly what behavior the price will exhibit within your scaling-in window - to illustrate with your example, let's say the price gets to $12: with scale-in, i will have 200 @ 11.50 avg price, without scaling i have 300@12 - then assume, for example, that thereafter the price violently spikes (or gaps) up to $20 - with my strategy, i wouldn't have a resting order for 100 idling at $13, so i'd still be with 200@11.50 vs 300@12... - hence you can see that the risk in this case is very different between what you refer to as "equivalents".

 

[BENG]

Quote from fader:

i don't quite understand - how can i get a more favorable price once it has reversed? - the point of scaling-in is to buy as the price is coming down (as per your example), not once it has reversed...

That is called average down. A big no no.

Scaling in works best when the first position is in your favor.

JMHO.

 

[Buy1Sell2]

Averaging down or up is a very good strategy as long as one follows this rule-- Never overextend. For example if I have a position go against my portfolio by .25% and I decide to add to a "Loser" , then that may well be the prudent thing to do. However, if the position is against me for 5% and I decide to average in, that's where it is a bad strategy. Just to say "Losers averabe Losers" is too much of a blanket statement and taken out of context means nothing. First one must define what a losing trade is. For me a trade only becomes a loser when I touch 2% of my account size. Until then the trade still has possibilities, especially when I am using decent directional analysis to enter th trade in the first place. Traders who average into trades that initially go against them by a bit, are the real winners in any market, not trend followers. We do follow the trend, but we have been in from much earlier on and better prices than trend followers.

As for scaling out---Never ever scale out.

 

[fader]

Quote from BENG:

That is called average down. A big no no.

Scaling in works best when the first position is in your favor.

JMHO.

you are failing to make an important distinction - to clarify, fyi here's a link that talks about "Averaging In, Not Averaging Down"
http://bigpicture.typepad.com/comments/2006/04/scaling_versus_.html

a quote from it: (although i don't agree with all of it absolutely, it conveys the right idea).
"The primary difference between averaging down and averaging in is one of intent. When you average down, you generally do so because you believe the market action is wrong. When you average in, you are simply taking advantage of volatility and not making any judgments about how smart the market may be."

 

[fader]

Quote from Buy1Sell2:

Averaging down or up is a very good strategy as long as one follows this rule-- Never overextend. For example if I have a position go against my portfolio by .25% and I decide to add to a "Loser" , then that may well be the prudent thing to do. However, if the position is against me for 5% and I decide to average in, that's where it is a bad strategy. Just to say "Losers averabe Losers" is too much of a blanket statement and taken out of context means nothing. First one must define what a losing trade is. For me a trade only becomes a loser when I touch 2% of my account size. Until then the trade still has possibilities, especially when I am using decent directional analysis to enter th trade in the first place. Traders who average into trades that initially go against them by a bit, are the real winners in any market, not trend followers. We do follow the trend, but we have been in from much earlier on and better prices than trend followers.

As for scaling out---Never ever scale out.

good opinion on scaling-in, as for scaling-out, i strongly disagree -however, i won't go into a discussion of scaling-out here, it would need a separate thread - currently, i am focused only on scaling-in methodologies.

 

[BENG]

Quote from fader:

you are failing to make an important distinction - to clarify, fyi here's a link that talks about "Averaging In, Not Averaging Down"
http://bigpicture.typepad.com/comments/2006/04/scaling_versus_.html

a quote from it: (although i don't agree with all of it absolutely, it conveys the right idea).
"The primary difference between averaging down and averaging in is one of intent. When you average down, you generally do so because you believe the market action is wrong. When you average in, you are simply taking advantage of volatility and not making any judgments about how smart the market may be."

I understand what you mean fader.

Maybe the question of scaling in could be eliminated altogether if the question becomes how to find a better volatility adjusted entry point, so you don't need to scale in again.

I have problems with exit, but I don't have any problem with entry, because when I'm wrong, I know about it almost right away due to my "close to perfect entry"... ggg