"Scaling out" is inferior behavior

[lescor]

Quote from Buy1Sell2:

I view daytrading and trading at the open as inferior behavior as well.

You might not know much about trading outside your closed world, but you know how to make us laugh!

 

[patrick_newB]

Quote from Buy1Sell2:

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.

You could learn a lot from triple A and Mav's posts. Bottom line is that using scaling (in or out) should be based on whether scaling improves or worsens your net performance and NOT on common sense (which often turns out to be wrong).

 

[HispaTrader]

The book Smarter Trading by Perry Kaufman devotes an entire chapter on Profit-Taking (Scaling Out). Below is an excerpt from the book, which I recommend.

The following are some strong arguments for profit-taking:

• Profit-taking has smaller slippage, because trades are closed out when prices are moving in the profitable direction.
• The more profit-taking, the less exposure to market uncertainty and fewer equity swings. The risk declines because you are not in the market as much, thus avoiding unnecessary volatility and an occassional price shock.
• The extra profits that may be gained at the end of a move tend to have much higher volatility associated with marginal returns.
• Setting a smaller profit-taking level means that the system does not depend on a few large profits, but on regular price movement.

Closing out a trade with profits is not only personally satisfying but is sensible. As with other rules, it must be done properly. When deciding to use profit-taking, the only disadvantage is the fear of "missing the big move." Instead, trading can be improved.

 

[Bitstream]

Quote from Buy1Sell2:

No. I am a position trader who occasionally puts on a swing trade. I view daytrading and trading at the open as inferior behavior as well.

lmao, u do realize how superficial and discriminate is this pathetic statement. ror.

 

[Hydroblunt]

Quote from Buy1Sell2:

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.

I'll give you a simple example where it may become apparent that your common sense is lacking.

I go long 800 shares of a stock part of a sector that does 500k-1mil volume a day. It goes my way, I'm in the money and it starts accelerating with a parabolic move. Anyone who trades sector stocks, know that these spikes up get sold into. When they pull back, they pull back hard with little liquidity. And sometimes, they end the move.
Hence I put out an offer out for 200-400 shares at a price that at the moment would need a spike. The rest I plan to hold foreseeing a possible bigger move.

Following your mentality, I would either exit at the spike up with no consideration for the bigger move, hold out for the big move or exit when it's obvious the whole move is over. By scaling, I can capture the spike up with a part of my shares and let the rest ride.

Let's do a simple math example. You are in the money 10 cents and the spike starts. 50% chance the move continues after the spike without knocking you out, 50% chance it won't or just knocks you out. We'll make 10 cent profit the stop, 50 cent the spike, 1 point the "big move".

So scenario A you hold all 800 for the big move (no scaling), scenario B you scale out half at the spike, hold half for the big move. Do the math, it's pretty basic. You can also throw in Scenario C where you exit at the spike with 800 shares, which would show an edge that scaling gives you.

These are all hypothetical numbers, obviously. I think they are somewhat close to reality. And I am ignoring the extra slippage 800 shares would experience.

 

[Optionpro007]

Hydro it's not about common sense but different perspective.

b1s2 is talking about (for example) going long the ES on May/03 and still be long today...

Short term traders correctly focus on exit before a trade is placed. Long term traders let the market tell them when to exit.

No comparison. Both styles can be profitable though.

One must trade his/her own personality.

Quote from Hydroblunt:

I'll give you a simple example where it may become apparent that your common sense is lacking.

I go long 800 shares of a stock part of a sector that does 500k-1mil volume a day. It goes my way, I'm in the money and it starts accelerating with a parabolic move. Anyone who trades sector stocks, know that these spikes up get sold into. When they pull back, they pull back hard with little liquidity. And sometimes, they end the move.
Hence I put out an offer out for 200-400 shares at a price that at the moment would need a spike. The rest I plan to hold foreseeing a possible bigger move.

Following your mentality, I would either exit at the spike up with no consideration for the bigger move, hold out for the big move or exit when it's obvious the whole move is over. By scaling, I can capture the spike up with a part of my shares and let the rest ride.

Let's do a simple math example. You are in the money 10 cents and the spike starts. 50% chance the move continues after the spike without knocking you out, 50% chance it won't or just knocks you out. We'll make 10 cent profit the stop, 50 cent the spike, 1 point the "big move".

So scenario A you hold all 800 for the big move (no scaling), scenario B you scale out half at the spike, hold half for the big move. Do the math, it's pretty basic. You can also throw in Scenario C where you exit at the spike with 800 shares, which would show an edge that scaling gives you.

These are all hypothetical numbers, obviously. I think they are somewhat close to reality. And I am ignoring the extra slippage 800 shares would experience.

 

[HolyGrail]

There are many reasons why scaling in and out can make good sense. If I get a 10% up move in one day you better believe I am going to sell some shares. Now I will probably buy them back after the gap partially fills, but I am going to lock in some profits.

If I don't like the action of a stock after a few days I may take half of my shares off the table right then.

If you are a position trader YOU CAN ALWAYS GET BACK INTO THE STOCK. There is no need to buy and hold at all costs.

edit: and as everyone knows, you haven't made a profit until you book some of those profits.

 

[Hydroblunt]

Quote from optionpro007:

Hydro it's not about common sense but different perspective.

b1s2 is talking about (for example) going long the ES on May/03 and still be long today...

Short term traders correctly focus on exit before a trade is placed. Long term traders let the market tell them when to exit.

No comparison. Both styles can be profitable though.

One must trade his/her own personality.

I fail to see how

"'Scaling out" is inferior behavior" in any way suggests that it is dependent on the trading style or "personality" whether the tactic makes sense. I dunno, something about that "inferior" word.

Draw a matrix with A, B, C on top and the two 50% outcomes on the side. Do the math, it shows the 3 perspectives and supports what the others were trying to explain b1s2 about risk/reward.
Test it on several timeframes if you need to. I bet if you plug in slippage, it would prove to be the wiser choice considering the drawdown. If you have unlimited BP to play with, then no.

 

[USAtrader]

Quote from optionpro007:

Short term traders correctly focus on exit before a trade is placed. Long term traders let the market tell them when to exit.

As a short term trader, all this time I must have been "[in]correct" in letting the market tell me when to exit.

 

[OldTrader]

Quote from optionpro007:

Hydro it's not about common sense but different perspective.

b1s2 is talking about (for example) going long the ES on May/03 and still be long today...

Short term traders correctly focus on exit before a trade is placed. Long term traders let the market tell them when to exit.

No comparison. Both styles can be profitable though.

One must trade his/her own personality.

First, if I correctly understood what B1 said, his point was that there is a correct way to trade, and it has nothing to do with one's personality. With that point I completely agree. The markets have their own ways...and they have nothing to do with YOUR "personality". I think the point is to learn the ways of the market. If your personality stands in the way, then you better go about changing it.

In terms of short term traders "correctly focus on exit before a trade", perhaps that is why B1 said that he felt day trading was an inferior method of trading.

I have done some scale-in, and some scale-out....but more scale-in. I'd say the reason for the scale-in is that I to put a small position on at first, test the waters so to speak, then add to it as long as my reason hold. Sometimes I add on weakness, sometimes on strength as it proves itself. One advantage of this is that when/if it immediately goes against you and starts to prove you wrong, you have a minimum position on.

In terms of scale out, it is never because I have too large a position on. I probably trade less leveraged than most here I would guess. I also use wide stops. I like to sell part of my position into strength (buy into weakness) when I'm exiting. What I've found is that this usually leaves something on the table initially, and therefore I might have benefitted had I left the position alone and intact. Many times when I sell part, it isn't long until I've sold all. But it does take some risk out of the equation, allow you to view the remaining part of your position with more equanimity. That said, I think B1 makes a good point that holding makes more sense. Just get out of all of it at once. The good positions can go farther than you could have ever dreamed.

By the way, I actively day trade and position trade. I'd say my position/swing trading is more profitable. Day trading is something I tend to do when I'm less confident about the bigger picture.

OldTrader