"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
Thanks Jimmy Jam very much for the kind words here.



Quote from JimmyJam:

A sincere thanks for the thread B1S2, you've helped me resolve my own questions about scaling-in/out with the input of a lot of good traders.

The strength and conviction of the viewpoints argued shows that this is a key part of any successful trading methodology, one which is just as important as when to enter a position.

For what it's worth (to me at least) I'm with you 100%, taking profits too early turns a great system into being merely good, and makes a good system just barely so. Anything else is going to end up below Zero Line threshold for profitability

Regards and Good Trading,

Jimmy Jam
:)
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An example of a "superior strategy" would involve scaling out of holdings as their positive expectancies diminish, replacing them with new holdings having higher positive expectancies. Such an approach would theoretically provide greater returns while dampening volatility through increased diversification.

Quote from Buy1Sell2:

The reason folks scale out is many times due to the fact that they took a larger position than they were comfortable with initially...
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Why are the OTHERS scaling out? Risk management? Quantitative re-deployment of assets? You can't prove a totality by proving one subset. Check your Venn diagram again. Thanks.
 
You can't prove a totality by proving one subset. Check your Venn diagram again.

I need to remember this sound bit verbatim as it will save a lot of argument.
 
This is a simple math premise concerning one trade. Do not try and confuse the issue. If we were to examine what you are mentioning here, then it would be argued that if the expectancy is better elsewhere, then the whole trade should be taken off at the same time and transferred to the higher expectancy trade. Why would some of the trade be left on? --Doesn't make sense--sorry. Many people are making the case for me and don't realize it.



Quote from BlindLemonBoosh:

An example of a "superior strategy" would involve scaling out of holdings as their positive expectancies diminish, replacing them with new holdings having higher positive expectancies. Such an approach would theoretically provide greater returns while dampening volatility through increased diversification.



Why are the OTHERS scaling out? Risk management? Quantitative re-deployment of assets? You can't prove a totality by proving one subset. Check your Venn diagram again. Thanks.
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:)
 
Quote from Buy1Sell2:

Scaling out is inferior behavior.
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Really? And I thought that making absolute pronouncements in an environment of uncertainty was inferior behavior. How foolish of me.
 
Quote from Buy1Sell2:

then the whole trade should be taken off at the same time and transferred to the higher expectancy trade.



:)
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Incorrect. You aren't risk-adjusting your results. Diversification smooths the equity curve in the scenario I outlined, providing a superior risk/reward profile. I would have to trade with leverage to bring our risk levels to equivalence (goosing returns in the process). You are ignoring this "apples to apples" adjustment.
 
Scaling out is an averaging process. If the markets are in a state where it's fractal dimension is (well "below") less than .5 (reverting to the mean), then it may make sense to scale out and buy back at support. If the fractal dimension of the market is (well "above") > .5 (trending), then scaling out is likely to cause leaving lots of money on the table.

This can all be tied to expectancy because expectancy is a function of underlying volatility. For example, if you look at the way that option models use trees to value an option, you can see that they assume Geometric Brownian motion of the underlying, and the expectancy at each node in the tree comes from the probability of an up move or a down move. The model is doing an averaging process at each node. I haven't thought it through, but the logic to scale out or not is probably similar to that used in option model trees.

Therefore, imo the answer is, you gotta know what type of market you are in (i.e. volatility), and then adjust accordingly how you take profits because expectancy is different in each type of market. This is hugely complicated because the market (from a game theoretic point of view) is playing mixed strategies in all time frames.

Imo, scaling out in some form (note that this is more complicated than it seems at first) is critical in todays markets. Look at ES, it looks like a chart of ZN for crying out loud!

nitro
 
The prudent is already diversified before entering into the trade, therefore this makes your argument irrelevant. You are attempting to move the discussion into a long back and forth on how a person should manage their entire portfolio. I am discussing how to manage each individual trade.

Quote from BlindLemonBoosh:

Incorrect. You aren't risk-adjusting your results. Diversification smooths the equity curve in the scenario I outlined, providing a superior risk/reward profile. I would have to trade with leverage to bring our risk levels to equivalence (goosing returns in the process). You are ignoring this "apples to apples" adjustment.
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