Scaling in/out: Crutch for the Weak

[Bolimomo]

Quote from billyjoerob:

Who said anything about picking tops or bottoms?

You said: If you average down and average up, then your average price will in all likelihood equal your initial price over your trading lifetime - what was achieved? And if your initial buys were well-timed, then scaling in will only hurt your profits.

if your initial buys were well-timed. Okay this does not necessarily means the top (to sell) or the bottom (to buy). But it does means "my one price is the best that I will live with".

You seemed to be questioning people from averaging-down on a losing position. But your presentation has a broader stroke of slapping scaling in and scaling out. Scaling in and scaling out is a technique. I am not buying all at exactly $100.00. I will be willing to buy around $99.50 to $100.50 - with a target of $105. Sometimes I do so in parts just to test the market with fewer shares to see which way the wind really blows before committing a full size.

Transaction costs: there is some commission structures called "per share". You pay on a per share basis. Buying in 3 parts (e.g. 300, 300, 400) virtually makes no difference compared to buying in 1 part for 1000 shares.

 

[billyjoerob]

Quote from Bolimomo:

You said: If you average down and average up, then your average price will in all likelihood equal your initial price over your trading lifetime - what was achieved? And if your initial buys were well-timed, then scaling in will only hurt your profits.

if your initial buys were well-timed. Okay this does not necessarily means the top (to sell) or the bottom (to buy). But it does means "my one price is the best that I will live with".

You seemed to be questioning people from averaging-down on a losing position. But your presentation has a broader stroke of slapping scaling in and scaling out. Scaling in and scaling out is a technique. I am not buying all at exactly $100.00. I will be willing to buy around $99.50 to $100.50 - with a target of $105. Sometimes I do so in parts just to test the market with fewer shares to see which way the wind really blows before committing a full size.

Transaction costs: there is some commission structures called "per share". You pay on a per share basis. Buying in 3 parts instead of 1 part virtually makes no difference in buying in 1 part for 1000 shares.

If a position is worth taking, it's worth taking with a full position. Again, all of your toe-dipping and finger-in-the-winding accomplishes nothing.

Think about it this way. If you have ten positions, selling each position is a scaling out, scaling out of your total portfolio. There is no need to do that per position.

 

[zboy2854A]

Quote from billyjoerob:

It's interesting that none of the defenders of scaling in/out as a valuable form of money management are willing to defend it . . . It may be indefensible as anything other than a psychological crutch ("sure my first buy was bad but now I can scale in, spread my risk over time, reduce my cost basis, etc.) for those trying to improve win rate at the expense of profitability.

Sorry, but this is pure nonsense. I'll be happy to defend scaling in, because that is how I establish ALL of my positions, to great success.

Firstly, you are approaching the subject from a one size fits all perspective, which you cannot do without first knowing exactly what is the nature of the play, your goals for the play, and what are the reasons compelling you to execute it.

Are you entering a position strictly as a technical/chart play? If so, then yes, I'd agree that scaling in/averaging down doesn't make sense, since the whole premise of the play is based upon a singular price area or level of support/resistance or other technical pattern that you are counting on to either hold or be breached. So if your initial entry is proven wrong, then your entire reason for getting into the trade was wrong, and you should cut your losses and move on.

However, if you are establishing a position by capitalizing on contrarian plays, such as buying into extreme weakness or selling into extreme strength using various non-chart indicators, and your time frame for the play to develop is anywhere from weeks to months or even years, which is how I trade and invest, then scaling in is IMO the ONLY way to successfully establish a position.

While it is impossible for anyone to pick an exact top or bottom, it is in fact possible to identify general topping or bottoming processes, and establishing a ladder of orders ensures that you can gradually accumulate a position as the process continues to its ultimate conclusion. Note that scaling in is part of the advance plan long before the first trade is executed, as opposed to someone emotionally changing their strategy after they had only planned to make a single purchase, then trying to justify averaging in. If that's the case, then that person's trading plan was flawed from the start, or they blew their own trade management by acting "on the fly".

Ultimately you have to first understand why you are getting into a position to know whether scaling in is the right method. But I can assure you that it is indeed a very valid and valuable method, depending on what kind of trading or investing you do.

 

[billyjoerob]

Does the scaling in help you get a better price? If so, only by averaging down. I'd like to hear somebody defend averaging down . . .

I suspect that scaling in is more psychological hedging than a trading strategy.

 

[zboy2854A]

Quote from billyjoerob:

Does the scaling in help you get a better price? If so, only by averaging down. I'd like to hear somebody defend averaging down . . .

I suspect that scaling in is more psychological hedging than a trading strategy.

Isn't scaling in by definition averaging? So yes, I'm defending scaling/averaging down/whatever you want to call it, as it helps get a better price, since as I stated, no one knows where the exact bottom or top for an asset may be, but having a ladder of orders guarantees that you can buy at or near the very bottom or top whenever it may occur, and in the process improve your average cost on the position.

And while having a properly planned set of orders in place in advance does indeed cut down on emotional pitfalls that occur with firing off orders in real time during actual market action, it is indeed a trading strategy.

 

[billyjoerob]

I think Warren Buffett had a thought experiment in which the market was only open one day a year . . . what would you do? You probably wouldn't scale in . . . It's true that in some situations the waiting is the hardest part, but that's not an excuse for scaling.

The "you can't pick tops and bottoms but you can get close" argument assumes that you're trying to reduce the variance, whereas if you buy once the mean will be the same but with more variance. In that perspective, diversifying by price is like eating lots of snacks instead of a big meal. The end result is the same.

 

[schizo]

Quote from jack hershey:

What you are saying is that you are an average person.

Sorry to have misled you. You obviously overlooked my sarcasm. Anyway, it's hard not to become a hardcore cynic after twenty years of trading, especially in light of how many idiots masquerade as successful traders.

 

[schizo]

Quote from billyjoerob:

I think Warren Buffett had a thought experiment in which the market was only open one day a year . . . what would you do? You probably wouldn't scale in . . . It's true that in some situations the waiting is the hardest part, but that's not an excuse for scaling.

The "you can't pick tops and bottoms but you can get close" argument assumes that you're trying to reduce the variance, whereas if you buy once the mean will be the same but with more variance. In that perspective, diversifying by price is like eating lots of snacks instead of a big meal. The end result is the same.

I'm really curious. Does all this really matter? To me, it boils down to one (or maybe two) thing:

1) Are you richer today than you were yesterday?
2) Did you trade according to the plan?

Everything else is a useless rubbish IMHO.

 

[illiquid]

Quote from billyjoerob:

If a position is worth taking, it's worth taking with a full position. Again, all of your toe-dipping and finger-in-the-winding accomplishes nothing.

Think about it this way. If you have ten positions, selling each position is a scaling out, scaling out of your total portfolio. There is no need to do that per position.

Who are you trying to help with this advice? I don't understand how scaling in relates to "full position". Either you are talking to position traders/investors, who can take a full position gradually and not have a huge impact relative to the total profit, or you are talking to short-term traders, who usually can get screwed if they take their entire line in one market order. What's with the one size fits all attitude? Are you the same guy who started a similar thread a few years back, B1S2?

I mean sure I believe if there's a good trade to be taken, you go for the jugular. But what that has to do with not scaling in I can't figure out. Planned scaling into and out of a trade is prudent and more risk averse than otherwise -- that is the only key difference in this question, you are cutting off the best/worst case scenarios and settling for the middle. You may think of it as chicken but most would call it conservative.

Anyways, if it can work for Paul Tudor Jones, who are you to argue otherwise?

 

[illiquid]

Put it this way: you put on a trade at full position all at once. Subsequently you see that it's such a great idea, you double down on it. You've technically scaled in, but does this amount to a "weak" move? Note I didn't mention if the second entry was better or worse than the first.

The original issue is like arguing over using limit orders vs market orders -- in the end it's not gonna make a huge difference on success vs failure. This thread is borderline trader OCD, no?