"Scaling out" is inferior behavior

[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.

 

[CutsThrough]

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.

Depends on one's time horizon and trading size. Very often scalpers scale out as a risk management strategy so that a win of x cents won't turn into a loss due to slippage if there is not sufficient liquidity. But, perhaps this cedes to your point that such size would be too large - that's up for debate.

Is "too big" of a trading size relative to one's capital base or the liquidity of the instrument being traded?

 

[Free Thinker]

there is no "right" way to trade. the best way to trade is to find a strategy that matches your personality. for some people scaling works. simple as that.

 

[Buy1Sell2]

Quote from CutsThrough:


Is "too big" of a trading size relative to one's capital base or the liquidity of the instrument being traded?

Capital base. If an instrument is illiquid, we must presume that the trader will trade less rather than more to begin with. Lord help the fool who is overextended in lumber futures.

 

[J-Trade]

Quote from vhehn:

there is no "right" way to trade. the best way to trade is to find a strategy that matches your personality. for some people scaling works. simple as that.

Well said, vhehn.

The best trader I know - a very successful man - scales both in and out.

In backtesting mechanical trading systems with a suitable parameter set , I have noted that scaling out almost always reduces total net profit, whilst also smoothing the equity curve, increasing the winning percentage and reducing the drawdowns. Many would find these worthwhile trade-offs, as do I.

J.

 

[Buy1Sell2]

Quote from vhehn:

there is no "right" way to trade. the best way to trade is to find a strategy that matches your personality. for some people scaling works. simple as that.

This is incorrect. There is a right way to trade and scaling out is not part of that. Anyone feeling the need to scale out, was wildly overextended from the beginning. I guess it could be argued then that scaling out is good because it gets the person back to a position where they won't get whacked. However, it is part of a greater failed system/plan from the beginning. The need for scaling out should never be felt --ever. Equity curves will be smoothed by an overall better entry size. period.

 

[JimmyJam]

Quote from J-Trade:

Well said, vhehn.

The best trader I know - a very successful man - scales both in and out.

In backtesting mechanical trading systems with a suitable parameter set , I have noted that scaling out almost always reduces total net profit, whilst also smoothing the equity curve, increasing the winning percentage and reducing the drawdowns. Many would find these worthwhile trade-offs, as do I.

J.

Thanks for the analysis J.

For intra-day trading, my results are congruent with yours, however I think that non-scaling out will produce better mid-to-long term results (monthly-yearly) while still trading on an intra-day timeframe.

Regards,

JJ

edit: I am scaling-out less and less and learning to just holding the trade.

 

[JORGE]

If you do not scale out of trades, is it safe to assume that you have the ability to pick the exact top's and bottom's?

 

[J-Trade]

Quote from Buy1Sell2:

There is a right way to trade

Buy1Sell2,

If psychology was not a critical part of trading - and I would say it is hard to argue otherwise - I would agree with you : if backtesting shows that not scaling out produces the optimal net profit, there it is.

However, the failure to succeed by many hard-working traders appears to be very highly influenced by psychological factors. If these can be reduced by scaling out, so much the better. It has helped me immensely, combined with reducing my trade size.

My guess is that the successful scale-in , scale out trader to whom I referred earlier would argue convincingly that his way of trading is optimal for his discretionary style.

But that is my guess and this is my opinion.



J.

 

[Buy1Sell2]

Quote from JORGE:

If you do not scale out of trades, is it safe to assume that you have the ability to pick the exact top's and bottom's?

Most times, I am able to pick the area. Not the tick, but the area.