So you're saying you may be an average person who doesn't have his feet in his mouth.
Ambulate and be fleet of foot.
Warmup gabfly for us.
Scaling in/out: Crutch for the Weak
- Thread starter billyjoerob
- Start date
So you're saying you may be an average person who doesn't have his feet in his mouth.
Ambulate and be fleet of foot.
Warmup gabfly for us.
Well, scaling used in what context? If you're a "fader" (so sorry, let me re-phrase to the term 'mean reversion' trader) or a market timer (you're right and everybody else is wrong) then of course scaling might aptly be labeled a "crutch for the weak".
If you're moving size then you are usually scaling. Depends on what you're trying to do and how liquid the market is. For me, I have to take arbitrage into consideration as a spread trader. If I take a market sellers, for example, with one order I might not get my other leg executed in an ancillary and correlated market at the level I need. So instead of selling 300 I might sell as many 50 lots as I can provided the price levels are where I need to be.
For me, alot of it depends upon if the exchange order matching algorithm is FIFO or Pro-Rata. I scale all of the time and virtually every trade I take - both getting in to and out of the market. But it's not because I'm the cat's ass, it is out of pure practical necessity.
When you start trading size, you will find that you pass on some trades and in general you go about things a bit differently. I quit trading Liffe Euribor because they capped the FIFO at 200 before Pro-Rata kicks in. Took it elsewhere. Leave all the gamesmanship to the spoofers. I'm not going to bid 1,000 to get 50 like the 'flippers' of the world.
If you're moving size then you are usually scaling. Depends on what you're trying to do and how liquid the market is. For me, I have to take arbitrage into consideration as a spread trader. If I take a market sellers, for example, with one order I might not get my other leg executed in an ancillary and correlated market at the level I need. So instead of selling 300 I might sell as many 50 lots as I can provided the price levels are where I need to be.
For me, alot of it depends upon if the exchange order matching algorithm is FIFO or Pro-Rata. I scale all of the time and virtually every trade I take - both getting in to and out of the market. But it's not because I'm the cat's ass, it is out of pure practical necessity.
When you start trading size, you will find that you pass on some trades and in general you go about things a bit differently. I quit trading Liffe Euribor because they capped the FIFO at 200 before Pro-Rata kicks in. Took it elsewhere. Leave all the gamesmanship to the spoofers. I'm not going to bid 1,000 to get 50 like the 'flippers' of the world.
I think it's trivially easy to defend scaling in and scaling out when you're trading size. More or less the definition of size is that you can't get in or out at an acceptable price in one market order. Great.
Now for technical traders who are consuming liquidity, I think scaling in and out is retarded. Let's say for example you're trading futures and you buy one contract when signal X hits, and then if the position moves for you (or against you, doesn't matter for this example) you buy a second contract. Now, it's easy to go back and examine your first contracts and your second contracts on each trade for profitability. The conclusion of this exercise will always be that you should either a) buy both contracts on the initial signal or b) wait and buy both contracts at the point where you would have bought the second one, or c) that neither works. In this sense, scaling in and out is indeed some sort of crutch.
For technical traders who are providing liquidity, what position you end up with is largely a function of whether or not you get hit I suppose. You'll scale in/out or get your position all at once as the market dictates to you.
The only place where I can see any controversy is for long term discretionary fundamentals traders who do not have a well defined signal for entering positions. I think it's common in that setting to have the right idea at the wrong time & price, so scaling in and out may be a useful concept.
Now for technical traders who are consuming liquidity, I think scaling in and out is retarded. Let's say for example you're trading futures and you buy one contract when signal X hits, and then if the position moves for you (or against you, doesn't matter for this example) you buy a second contract. Now, it's easy to go back and examine your first contracts and your second contracts on each trade for profitability. The conclusion of this exercise will always be that you should either a) buy both contracts on the initial signal or b) wait and buy both contracts at the point where you would have bought the second one, or c) that neither works. In this sense, scaling in and out is indeed some sort of crutch.
For technical traders who are providing liquidity, what position you end up with is largely a function of whether or not you get hit I suppose. You'll scale in/out or get your position all at once as the market dictates to you.
The only place where I can see any controversy is for long term discretionary fundamentals traders who do not have a well defined signal for entering positions. I think it's common in that setting to have the right idea at the wrong time & price, so scaling in and out may be a useful concept.
I'm not sure how a bid/ask spread for a technical trader defines either brilliance or mental retardation - especially in the context of an average true trading range for just about any instrument.
Selling an offer in a rally market is hardly a technical or fundamental edge, and getting a liquidity rebate is hardly a noteworthy edge when you got your ass run over for thirty cents.
For me, at least, as long as I stay on the correct side of my technical trading model's signal bias scaling is incredibly effective. I am in and out of the market like a mechanic, and I carry a core position overnight as long as my model's bias is intact.
Selling an offer in a rally market is hardly a technical or fundamental edge, and getting a liquidity rebate is hardly a noteworthy edge when you got your ass run over for thirty cents.
For me, at least, as long as I stay on the correct side of my technical trading model's signal bias scaling is incredibly effective. I am in and out of the market like a mechanic, and I carry a core position overnight as long as my model's bias is intact.
To me, scaling in/out is not about initial cost basis, the reasoning behind the technique is to minimize risk until a direction is chosen. It is not a tactic for all trading but it seems like a necessity if your trading system is one that requires constant reentry because of signal headfakes. Someone playing penny stocks from a technical POV would benefit from scaling in/out.
Another advantage to scaling into a play is when dealing with extremely volatile markets or illiquid markets. With an extremely volatile market, because pps moves harder in either direction, you can lose more (though admittedly win more as well) by playing with your regular amount of money. Scaling out of this play allows you to lock in profit but still stay involved in the play with less risk. With illiquid markets, scaling in could be used to keep your pps at a minimum. Let's say you wanted a larger amount of shares of an illiquid stock, if you throw it at the MM all at once, you are going to get some less than optimal fills. By scaling into the play, you minimize your price per share and your buying goes in under the radar. Institutional traders do it all the time as well
Another advantage to scaling into a play is when dealing with extremely volatile markets or illiquid markets. With an extremely volatile market, because pps moves harder in either direction, you can lose more (though admittedly win more as well) by playing with your regular amount of money. Scaling out of this play allows you to lock in profit but still stay involved in the play with less risk. With illiquid markets, scaling in could be used to keep your pps at a minimum. Let's say you wanted a larger amount of shares of an illiquid stock, if you throw it at the MM all at once, you are going to get some less than optimal fills. By scaling into the play, you minimize your price per share and your buying goes in under the radar. Institutional traders do it all the time as well