"Scaling out" is inferior behavior

Do you scale out of positions?

  • I always scale out

    Votes: 113 14.1%

  • I scale out most of the time

    Votes: 228 28.5%

  • Most of the time, I do not scale out

    Votes: 189 23.6%

  • I never scale out

    Votes: 270 33.8%
  • Total voters
    800
Not completely true.

While the short term trader is fiddling around the same instrument back and forth like a mad man, the position trader has 5-10 positions open making much more money with better risk diversification.

"Position traders do it better". Many of my ex-girlfriends would attest to this statement.

:D


Quote from illiquid:

There's always a trader who thinks he is superior to another; in your case, someone can look down in disdain at you "position" traders that sit through swings just to take out a "major" move in one trade. The position trader takes 100 pts out of a weekly move, while this other trader takes out 300 in the same time frame.

He would call you lazy for not locking in gains, then re-entering on pullbacks -- why sit through some obvious drawdawns in your position? Why not also temporarily flip your position to take out some more gains going the other way? Sounds silly doesn't it? Your answer to this is my answer to you.
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In general I agree that scaling out is sub-optimal. The method taught by Joe Ross of immediately taking a small profit to "cover costs" is a good example of a suboptimal way to trade. That said, I think there are a couple of situations that warrant scaling. One is if yu are trading size and you need to exit when there are buyers. That generally means trying to sell into a run up, not waiting for the high tick. The other is if you are using multiple exit strategies. For example, you may sell one tranche at first resistance, another on a reversal bar and a thrid on a MA cross. Over long periods one method might be superior but over shorter time periods, they may average out to be better than an all or nothing approach.

The real problem with scaling out is that it is the flip side of averaging in or doubling down on losers. Scaling out encourages you to sell winners which is generally not what you want to do. Someone may note that I am on the opposite side here from the doubling down debate, where I suggested that was not always a terrible thing to do. The reason is simple. If you are disciplined, and that can be a big if, you will get out of a doubled dwon loser quickly if it continues to go against you. Your loss is capped even if it is bigger. With winners, it is crucial to ride the big winners as long as possible with as full a load as possible. Scaling out hinders that.
 
Quote from optionpro007:

Not completely true.

While the short term trader is fiddling around the same instrument back and forth like a mad man, the position trader has 5-10 positions open making much more money with better risk diversification.

"Position traders do it better". Many of my ex-girlfriends would attest to this statement.

:D
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It was just a counter-example to a rather pompous argument. There are always occasions where one looks like the idiot compared to the other.

And hey, there's nothing out there that says you can't do both.
 
B1S2,

If anyone has doubts over whether scaling out should be a part of their plan, then they should not be trading imo. This is because anyone who intimately understands their winning and losing trades will KNOW whether to scale out or not.

For ex, if you've studied your trades and know that a very small % trades will stop you out immediately at a full loss, and further that a large % of your losers/break evens were once in the money by x amount, then you would be a fool not to scale out. This would be the Mark Douglas approach and what he recommends based on his own trading.

Conversely, if a large % of your losers are full loss stop outs, then you would be an idiot to scale out just to make yourself feel better...that would be the fast route to the poor house. This would be the Van Tharp recommendation.

So I disagree with Van Tharp who is anti scaling out as well as with those such as Mark Douglas who only recommend scaling out. Those absolute positions have more to do with a need for dogma in trading than sound logic.

Knowledge is power in trading/life and a lot of our fear comes not knowing. That kind of fear is perfectly rational. If you truly have an edge as well as a method which is consistent enough to study that edge, there will be no more doubts of whether to scale in or scale out. If you are using a nebulous trading idea generating setup, then that's a big problem because you have no basis to study your trades and acquire the knowledge that is necessary to trade confidently.

So in short, 2 things:
a. Scaling out or not is a decision that should be made based on the intensive study of your trades.

b. If you don't have a consistent way of generating trades, you won't be able to do the above.

There's been a LOT of posts/threads on this on ET, and a good part of what I've said above has been said many times before on this board.

To him who has ears...
 
agree.

:)


Quote from illiquid:

It was just a counter-example to a rather pompous argument. There are always occasions where one looks like the idiot compared to the other.

And hey, there's nothing out there that says you can't do both.
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<i>This is because anyone who intimately understands their winning and losing trades will KNOW whether to scale out or not.</i>

Very well explained... that is an excellent example of correct personal trade management. Entry, exit and stops are synonymous, and neither more or less important than another.
 
Quote from Eliot Hosewater:

I thought he also said scaling IN is more profitable that scaling out or doing nothing. That's the Turtle Trading method IIRC. Also, scaling in is just another form of cost averaging.
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Thanks for that.

JJ
 
Quote from Buy1Sell2:

Scaling out is inferior behavior. When we have a winner, it makes more sense to let it ride. Will that cause us to give back profits sometimes? Yes. However, it will keep you in the really big winners and more than offsets the savings by scaling out.

--The reason folks scale out is many times due to the fact that they took a larger position than they were comfortable with initially. In effect, they were wildly overextended. The scale out feature simply gets them back to where the total position is now of a more correct size for their account size and comfort level. In summary, they were scared when the original position was on and now have been lucky enough to get some profits and feel they can let the rest run. What happens though when the initial trade goes against? --Sometimes they let the whole trade run as losses mount. -No, it's better to size correctly and let it run to where you can exit at a time of your own choosing (borrowed line from George Bush). No sense being a weak hand.
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anyone who quotes a genius-mind like GWB must know what he is talking about too! :eek:
 
Bottom line-- traders who have been successful scaling out have duped themselves into believing that it helps with their profitability etc. However, they don't realize that the profits would be much more bountiful by letting the full winning position run. It's just common sense.
 
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