Just be prepared for the risk of ruin. I'll be straight with you and others. If you keep with that kind of strategy and consistently nail the market, especially with leverage, you'll make some real $$$ off a modest stake. On the other hand you must realize you're playing Russian roulette. There IS a bullet with your name on it. And it could be as fatal to your fiscal future as the real bullet would be to your cranium. Just hit as many empty cylinders first as you can.
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How do you scale-in and why?
- Thread starter fader
- Start date
Just be prepared for the risk of ruin. I'll be straight with you and others. If you keep with that kind of strategy and consistently nail the market, especially with leverage, you'll make some real $$$ off a modest stake. On the other hand you must realize you're playing Russian roulette. There IS a bullet with your name on it. And it could be as fatal to your fiscal future as the real bullet would be to your cranium. Just hit as many empty cylinders first as you can.
Quote from $CostAverageMAN:
I mean if you like it at 39.50 you got to love it at 31....And that's why I buy 5 times more
i think we differ on at least one important issue - it seems you are assuming that since it's gone lower, the chances of a bounce are higher... - as i mentioned in an earlier post, i am adhering to a statistical basis which assumes that the overall chances of a bounce are equal at best, irrespective of the price level.
Shameless self promotion but I go through a variety of scaling approaches in my book in Chapter 9.
http://www.amazon.com/gp/product/0471745936/ref=sr_11_1/103-9084900-9579027?_encoding=UTF8
For those not interested in buying Currency Trader magazine which is free is running that chapter in 2 monthly installments
http://www.currencytradermag.com/
Finally, someone posted "Never scale out". Can you elaborate why?
Since almost every successful intraday futures trader I've traded with has scaled out.
BTW the conclusion I arrive at is that geometric scaling in - 100,200,400, 800, 1600 will absolutely ruin you. However arithmetic scaling 100, 200, 300, 400 can work with HARD stops.
http://www.amazon.com/gp/product/0471745936/ref=sr_11_1/103-9084900-9579027?_encoding=UTF8
For those not interested in buying Currency Trader magazine which is free is running that chapter in 2 monthly installments
http://www.currencytradermag.com/
Finally, someone posted "Never scale out". Can you elaborate why?
Since almost every successful intraday futures trader I've traded with has scaled out.
BTW the conclusion I arrive at is that geometric scaling in - 100,200,400, 800, 1600 will absolutely ruin you. However arithmetic scaling 100, 200, 300, 400 can work with HARD stops.
I must come back and discuss this current situation.....1st I rarely use margin....2nd By the time I had my full position, IIIN represented about 1.3% of my total portfolio.....This is a very reasonable position for me.....The point of the whole situation was Nobody can call the bottom, so why put in your full position today when it could go lower tomorrow....This was just an example of dollar costing a position...
3rd when the 31.10 position was put in the stock had a trailing P/E of 10 and a forward of 7....Quite cheap for a steel company that as long as the Highway Bill stays intact they will maintain growth...I do agree that just because it goes down doesn't mean it will bounce back, but it had come from 60 as a high a little over a month ago....I was buying it 49% off it's high....A little oversold!!!!
Now would I take these kinds of measures on a stock like HANS that has a P/E of 60....I think not....There were fundamental reasons for this position.....I'm not a crazy old man when it comes to doubling down...
$COSTAverageMAN
3rd when the 31.10 position was put in the stock had a trailing P/E of 10 and a forward of 7....Quite cheap for a steel company that as long as the Highway Bill stays intact they will maintain growth...I do agree that just because it goes down doesn't mean it will bounce back, but it had come from 60 as a high a little over a month ago....I was buying it 49% off it's high....A little oversold!!!!
Now would I take these kinds of measures on a stock like HANS that has a P/E of 60....I think not....There were fundamental reasons for this position.....I'm not a crazy old man when it comes to doubling down...
$COSTAverageMAN
I posted this a while ago:
From "Speculation As A Fine Art And Thoughts On Life" by Dickson G. Watts (written around 1880):
From "Speculation As A Fine Art And Thoughts On Life" by Dickson G. Watts (written around 1880):
It is better to "average up" than to "average down." This opinion is contrary to the one commonly held and acted upon; it being the practice to buy, and on a decline to buy more. This reduces the average. Probably four times out of five this method will result in striking a reaction in the market that will prevent loss, but the fifth time, meeting with a permanently declining market, the operator loses his head and closes out, making a heavy loss - a loss so great as to bring complete demoralization, often ruin.
But buying at fist moderately, and, as the market advances, adding slowly and cautiously to the "line" - this is a way of speculating that requires great care and watchfulness, for the market will often (probably four times out of five) react to the point of "average." Here lies the danger. Failure to close out at the point of the average destroys the safety of the whole operation. Occasionally a permanently advancing market is met with and a big profit secured.
In such an operation the original risk is small, the danger at no time great, and when successful, the profit is large. The method should only be employed when an important advance or decline is expected, and with a moderate capital can be undertaken with comparative safety.
In a very general sense, I feel scaling in does not provide much benefit.
Let's say you want to take on a position with 3 contracts. Without scaling in, the worst case loss is simply
Loss = 3 * Stop Loss Amount
However, as you are scaling in, your entries become farther into the position, and hence farther away from the stop loss. Your worst case stop can be much more than the above loss, assuming the profit target or stop-and-reverse point was never hit.
And yes, I understand that there will be times where the position will be stopped out with a favorable excursion less than the various scale-in locations, and these smaller losses will mitigate the effect of the larger losses accrued by a favorable position reversing itself into a loss.
This neutralizing effect becomes apparent when you backtest these types of entry techniques.
This is just what I have observed in my own research, others may find differing results.
RoughTrader
Let's say you want to take on a position with 3 contracts. Without scaling in, the worst case loss is simply
Loss = 3 * Stop Loss Amount
However, as you are scaling in, your entries become farther into the position, and hence farther away from the stop loss. Your worst case stop can be much more than the above loss, assuming the profit target or stop-and-reverse point was never hit.
And yes, I understand that there will be times where the position will be stopped out with a favorable excursion less than the various scale-in locations, and these smaller losses will mitigate the effect of the larger losses accrued by a favorable position reversing itself into a loss.
This neutralizing effect becomes apparent when you backtest these types of entry techniques.
This is just what I have observed in my own research, others may find differing results.
RoughTrader
And at the risk of sounding foolishly arrogant, I will state that traders that claim that scaling out of positions should never be done simply do not know what they are talking about.
RoughTrader
RoughTrader
Quote from fader:
thanks for the input, i have gone through similar iterations - let me show how i think about this (still very much work in progress)
i am looking at this on a risk/return basis.
on the return side, i am assuming that the probability-weighted return is constant/equal at any level within the scaling-in window, which is the reason for scaling-in; in statistical terms, given the log-normal distribution of returns, i think you have to assume either constant or diminishing returns (i use constant for simplicity) but not increasing returns, i.e. as the price goes more against you, the expected return can't go higher...
then on the risk side, the probability-weighted risk is basically equal to the value of an option struck at the stop price and valued at-the-money at each respective scale-in level.
therefore, continuing with the option analogy, as the market price approaches the stop level, the ATM price will approach the strike price, hence the value of each respective option (and therefore, risk at each respective scale-in level) will get progressively higher.
hence if you want to keep a constant risk/return ratio throughout the scaling-in window (which is what i meant by "proportional" in my opening post), and if the return side of the equation is fixed, then as the risk rises at each respective scale-in level, you will want to scale-in at a decreasing rate.
Actually I feel that you should expect higher returns on the shares gotten that are the closest to the end price, assuming the end price is statistically significant. I mean the end price has to be way out there in odds of being hit. Say less then .1% of the time.
Let 1 equal the odds of getting hit. Find the additional move that will generate .5 the odds, then find the additional move that will generate .5 of that move. So 1x.5x.5. So small shares at 1, bigger shares at .5 and bigger shares at .25. The odds of being hit on the last shares need to be very low. Say .1% of so.
You find the increment to add at based on the moves that are half the prior move's probability. In other words don't use a method like add every dollar up etc.
John
Quote from jbt:
Shameless self promotion but I go through a variety of scaling approaches in my book in Chapter 9.
http://www.amazon.com/gp/product/0471745936/ref=sr_11_1/103-9084900-9579027?_encoding=UTF8
For those not interested in buying Currency Trader magazine which is free is running that chapter in 2 monthly installments
http://www.currencytradermag.com/
Finally, someone posted "Never scale out". Can you elaborate why?
Since almost every successful intraday futures trader I've traded with has scaled out.
BTW the conclusion I arrive at is that geometric scaling in - 100,200,400, 800, 1600 will absolutely ruin you. However arithmetic scaling 100, 200, 300, 400 can work with HARD stops.
here's how i look at the expected risk for each successive scale-in piece, it is equal to:
(i) probability of reaching a scale-in level (decreases for levels farther from the current price), multiplied by
(ii) probability of hitting the stop (increases for levels farther from the current price), multiplied by
(iii) the amount of stop (decreases for levels farther from the current price).
the first two probabilities are dependent on the underlying probability distribution.
assuming a log-normal distribution, i have looked at rough numbers which show that for scaling starting at 0-1 standard deviations from the current price and ending at ~1.5 standard deviations, to keep a constant expected risk level, the scaling should be done in roughly equal increments (actually, most of the scenarios show that the increments should somewhat decline initially and then increase back up but never be above the first scale-in increment; this is dependent on where the parameters are with respect to the shape of the bell curve...)
if one assumes some sort of a linear probability distribution, then the first two probabilities in the equation above may cancel each other out (i.e. as the likelihood of getting filled decreases, the probability of hitting the stop will increase by the same measure) - so the only remaining risk factor will be the amount of stop, in which case you'd end up with something like a geometric progression, i.e. if stop is 10 on the first scale-in, then the size is 10/10, if the second scale-in is at current price + 1, then stop is 9 and the size is 10/9, and so on, so the expected risk remains constant; this will produce a parabolic type progression.
however, i agree with your conclusion, this model may place an extraordinarily high weight on the last scaled-in piece, and intuitively i'd think the risk of hitting the stop from that level will get disproportionately high...
however, i will take a look at the materials you have referenced, thanks a lot for providing the references and the input - all the best.
Quote from Kensho:
I posted this a while ago:
From "Speculation As A Fine Art And Thoughts On Life" by Dickson G. Watts (written around 1880):
i made an omission in my opening post - there is counter-trend scaling-in vs. in-trend scaling-in (i believe also referred to as pyramiding into a trend) - they have somewhat different analytical frameworks, i am working on counter-trend scaling-in, i.e. entering at progressively more favorable prices.