"Scaling out" is inferior behavior

[Lights]

scaling out depends on where the stock is, ur timeframe, your position size vs. liquidity of the stock. ultimately, size is the most important. if take 80,000 shares of xyz, it's far superior to scale out than dump all with 800 shares at the top. even if i caught 1/4 of the overall move, i'd still make more than riding whole move with 800 shares.

 

[Lights]

depends on size vs. liquidity. portfolio managers scale in and out cos it's simply too difficult to buy or sell 1 million shares of xyz at once.

Quote from Buy1Sell2:

Little does this man realize that he would be tremendously more successful with out the scale outs.

 

[illiquid]

From Lipschutz's MW interview:

"I am definitely a scale-in type of trader. I do the same thing getting out of positions. I don't say, 'Fine, I've made enough money. This is it. I'm out.' Instead, I start to lighten up as I see the fundamentals or price action changing."

Do you believe your scaling type of approach in entering and exiting positions is an essential element in your overall trading success?

"I think it has enabled me to stay with long-term winners much longer than I've seen most traders stay with their positions. I don't have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don't think you can consistently be a winning trader if you're banking on being right more than 50% of the time. You have to figure out how to make money being right only 20 to 30 percent of the time."

Just one (position, fundamental/discretionary) trader's attitude for scaling, but essentially for the same reasons that some on this thread have given against it.

 

[romik]

Both my cousins have been using scaling both in/out for almost 10 years now, in various markets. They co-own a silver mine, a commercial bank, capital management firm, partners of various business ventures in Russia and USA. No doubt a person that scales out will make less on a large move as an "inferior" approach being used, but like in any other business, some business's gross profit is 90% when others generate 70% selling almost identical products/services. Looking at just GP it is obvious that the first business's operator is more successful, though it is quite possible for both to be profitable, just on a different scale. I am OK to be using an inferior method and by doing that being branded an 'inferior' trader as long as the method is profitable, so far it has been, both in theory and in practise. It's about making money, there is no 1 formula.

 

[jem]

Quote from Cutten:

I think all traders would agree that one's position size shoud reflect two things - the amount of risk one is prepared to tolerate, and the opportunity presented by the market in question. Let's assume we have decided our level of risk tolerance - the only thing then left to do is to evaluate the current risk/reward available in the trade.

If the trade is presenting a great risk reward, you should have a larger position. If the trade is good but not great, you would have an average size position. If the trade is acceptable but has some flaws (e.g. higher than normal uncertainty), then you would have a small position.

So, if we accept that position size should vary according to opportunity, "scaling out" not only makes sense, but is a requirement, in certain situations. If you have a position that started out great, but has now degraded somewhat, then you should reduce your position size. You may have started out long 20 lots, but now the risk has increased, the volatility is expanding, so the appropriate position size may only be 10 lots or even 5 lots. The expectation is still positive, but the risk is higher and/or the probability of success is lower and/or the reward has decreased.

Anyone who says position sizes should remain fixed is basically saying that all market opportunities have identical risk/reward profiles, and furthermore, that the risk/reward of a position does not change over its lifetime. I certainly don't agree with that. Look at any market and volatility fluctuates over time. If volatility increases, then other things being equal, you should reduce your position.

Thus - scaling out makes perfect sense in some cases.

Well said and should close the subject. Or at least parts of it.

 

[Buy1Sell2]

Quote from kiwi_trader:

Buysell,

You miss that there may be two "optimal areas." I used to trade the euro on 5min charts and there was a "this thrust" probable range and a "major thrust" probable range.

So, every thrust, I set half my position to exit on reaching the first target. I snugged and trailed stops for the other half. On retracements I would add another half unless the stop on the "free" part was so high that I could add still more "without risk"

This was a very workable approach to scaling out and back in. To evaluate the efficacy of such an approach I suggest treating it as two different trade setups --- evaluate each to determine whether it is worth pursuing. One has a rr in the 2:1 range with slippage and commission and a 70% win rate. The other is more like 4:1 and 45%. Trading the combination is both easy and profitable.

If you want to trade two different setups , they should be on two different time frames, but the total position does not exceed the maximum allowable size for your account. In that case you are not scaling out but taking entries and exits on two time frames--Nothing wrong with that, but it is not "scaling out". Now to your example: why trade the 70 percent trade? Lets say you make 10 trades with the 70 percent system and risk 10 dollars. 7 trades are winners for 140 dollars. 3 trades are losers for 30 dollars. The net is 110 dollars. Let's say you make 10 trades with the 45 percent system. 4.5 trades are winners for 180 dollars. 5.5 trades are losers for 55 dollars. The net is 125 dollars. Letting the trade run with full position is the better route. You are making my case FOR me.

 

[Buy1Sell2]

Quote from romik:

being branded an 'inferior' trader as long as the method is profitable, so far it has been, both in theory and in practise. It's about making money, there is no 1 formula.

No one is branding you an inferior trader. You are just using an inferior strategy. I didn't say money could not be made scaling out, I just said that you will make less of it.

 

[Buy1Sell2]

Quote from illiquid:

I Some traders have an "ironclad" strategy that they stick to no matter what; others admit to not even knowing where their exit point will be after they enter, incorporating price action and other variables on the fly. It's the latter camp which operates more comfortably in fluid or "grey zones" that seem to condone partial or staggered exits, while the former will stick to predetermined setups and expectancy, determined by long-term averages of past trades.

No. I am in the latter camp and don't scale out. I let the market tell me when to get out, although I have a general idea of how far a market should run when I enter the trade. As the trade gets more long in the tooth, I pay more and more attention to market action for reversal.

 

[MorganSys]

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.

Minimizing market impact...

 

[Buy1Sell2]

Quote from Cutten:

I think all traders would agree that one's position size shoud reflect two things - the amount of risk one is prepared to tolerate, and the opportunity presented by the market in question. Let's assume we have decided our level of risk tolerance - the only thing then left to do is to evaluate the current risk/reward available in the trade.

If the trade is presenting a great risk reward, you should have a larger position. If the trade is good but not great, you would have an average size position. If the trade is acceptable but has some flaws (e.g. higher than normal uncertainty), then you would have a small position.

So, if we accept that position size should vary according to opportunity, "scaling out" not only makes sense, but is a requirement, in certain situations. If you have a position that started out great, but has now degraded somewhat, then you should reduce your position size. You may have started out long 20 lots, but now the risk has increased, the volatility is expanding, so the appropriate position size may only be 10 lots or even 5 lots. The expectation is still positive, but the risk is higher and/or the probability of success is lower and/or the reward has decreased.

Anyone who says position sizes should remain fixed is basically saying that all market opportunities have identical risk/reward profiles, and furthermore, that the risk/reward of a position does not change over its lifetime. I certainly don't agree with that. Look at any market and volatility fluctuates over time. If volatility increases, then other things being equal, you should reduce your position.

Thus - scaling out makes perfect sense in some cases.

No Sir. ---No matter what the position size is at the beginning, the trade should be allowed to mature fully. Why would you get out of a winner unless the initial position size was overextended?? Scaling out when overextended is the only time that scaling out should be used. And it is used then, because you have realized that a mistake was made on size initially and you are fortunate enough to escape with some profits. If the size is correct at the start, then scaling out is middle to lower rung behavior.