"Scaling out" is inferior behavior

[GTS]

Quote from AAAintheBeltway:

While I tend to agree with you conceptually, I think there is a statistical flaw in the argument. You must assume that the historically optimal exit point remains optimal into the future.

I agree and disagree. Yes you have to assume that the historically optimal exit point remains optimal but that is true about all aspect of your trading.

The strategy you use is based on its history and you assume it will keep working. How do you know that any aspect of your strategy is still valid going forward? You don't - that's what trading is all about.

To say that you are not going stick with the historical optimal exit point because you think it may no longer be valid means that you dont trust your system anymore. If 6 used to be optimal but you are not sure it still is then why is 3 a better guess? Surely you need to have some rational reason behind such a change.

If your post-trade analysis uncovers that 5 is now a better exit then 6 then by all means change you exit from 6 to 5. I just dont ever see a reason to exit half at 5 and half at 6 - that sounds like an emotional decision, not a logical one.

 

[Pa(b)st Prime]

From a 2002 thread: http://www.elitetrader.com/vb/showthread.php?s=&postid=137503&highlight=rich+dennis#post137503

Quote from Pabst:

Great post Nitro. I am firmly with you and Commisso on this issue. I spent most of my career being a "true" scalper, i.e. a local who bought the bid and sold the offer. Adding to losers and peeling out of winners was my schtick. Very rewarding in the micro. Obviously low commissions and a tremendous positive expectancy are paramount for successfully employing such a strategy. However few traders are so skilled as to lay claim for any expectancy high enough to justify an even R/R. In the macro those "consistent, steady returns" that every novice yearns for are death waiting to happen.
True story. A guy was relating to me how he started way back in the MidAm with Rich Dennis. They would each enter a trade off the same setup. As the fellow I met would be getting out with a small profit, Dennis would be doubling up. I remember the phrase he used, "Rich would push the pedal to the metal on every trade." Of course RD was in his formative stages on his way to 200mil. Later in the evening a friend who was with me, said that the guy who had told us the story about Dennis had also been a pretty good trader. But on that night, many years after his prime, the fellow with the good tale, was toiling behind the bar pouring drinks.

 

[romik]

I scale out regularly and I suppose it can be classed as "inferior" tactics, I don't really care what it is to others as long as there is a positive ROI at the end of a trade. I wish I could get a better ROI on an average trade, at the moment I can do what I am capable of doing. Perhaps one day I'll move on to mostly swing, after positional and finish with investing, when/if I become an investor I would probably consider all my past experiences as "inferior behaviour".

 

[trend_guy]

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.

This is one of the best posts of the year and it's clear you are a successful trader... thanks for the post and your comments.

 

[kiwi_trader]

Quote from trend_guy:

This is one of the best posts of the year and it's clear you are a successful trader... thanks for the post and your comments.

Its just that he's wrong. In all of these discussions you can look at the failure mode for a behaviour and feel very wise. Then, if you're around trading long enough, you find there are also success modes - and some are very successful with them.

Almost everything works (even elliot wave) for someone. Just because I can't make it work doesn't mean it won't work for someone better/more suited to it than me.

 

[romik]

Trailing stop

a) +4 -> down 2 -> +2 total
b) +5 -> down 2 -> +3
etc

Scaling out

a) +4 (50% position closed) -> down 4 -> +4 on 50% (+2 on 100%) same as in trailing, but 'noise range' is widened to 4, which in fact can lead to maximising the end result.

 

[trend_guy]

Quote from kiwi_trader:

Its just that he's wrong. In all of these discussions you can look at the failure mode for a behaviour and feel very wise. Then, if you're around trading long enough, you find there are also success modes - and some are very successful with them.

Almost everything works (even elliot wave) for someone. Just because I can't make it work doesn't mean it won't work for someone better/more suited to it than me.

YUP! but there are things that work better... some traders make a million a year, some make 500 million, big difference!

 

[Hydroblunt]

Quote from HolyGrail:

We are leaving out the most important factor, the risk vs reward.

If a six dollar move is a 6r then there is nothing wrong with taking 3r at three dollars.

Don't bother.

Attemting to use math, statistics and concept of risk/reward is an INFERIOR way of thinking in this thread.

I was gonna show a detailed example of what happened to X today but I figured there is no reason. B1S2 is so convinced that all or nothing is the way to go that he refuses to even allow simple logic and basic math show him the other perspective.

As for most of the rest, I do not get why you automatically consider scaling out as taking small profits. How is scaling automatically imply small profits? I know sometimes reading long posts get annoying, but please try to reread what I stated about sector stocks and how they spike. If you get long foreseeing a halfday to full day trend but the stock ends up spiking hard upward, you have to be an idiot not to consider the pullback and possible breaking of the trend. It's a probability call, plain and simple. In layman's term, a stock spikes and I'm still bullish on it but not that bullish cause it made a significant move. So I lower my exposure since the odds for further gains are not that good. It becomes more speculative.

And can someone please PLEASE start considering capital base and time & focus to monitoring positions which can be a huge factor.

I've done the all or nothing and then I did scaling. At first I did it wrong, scaling out due to seeing too much money on the table, scaling out during a steady uptrend. But there is a correct way of scaling, one that tries to adjusts to the problems of exiting with the herd.

And also, a wise quote. "Don't be a pig".

 

[Thunderdog]

Quote from austinp:

The reasons given for scaling out of trades are usually based on emotion...

Perhaps, but not necessarily. Unless you are especially gifted or lucky, an all-or-nothing mentality is not particularly congruent with an environment of uncertainty.

 

[AAAintheBeltway]

Hydro,

I think we are saying basically the same thing. While backtesting may reveal one exit method as superior over long periods of time, on any particular trade there may be circumstances that warrant altering that approach. A high volume spike that gives you a chance to unload big size might be one.