"Scaling out" is inferior behavior

[dhpar]

Quote from nitro:

I don't agree with this attitude at all. When you can get a mathematically correct computation that does the right thing, you want to use it, even when you are trading discretionary. But the point really hits home when you are trying to implement an automated trading strategy, then it becomes critical that these questions be asked and that what you are doing is mathematically sound, or at least trading sound.

nitro

Fair enough - I tried to make it too simple so no wonder it kicks back.
It is obvious that for some types of trading (like black box) you may need to backtest what fits the best a particular strategy. That is however a different question to if you should or should not scale in/out. That decision comes before the black box is set up. I should disclose however that I do not run a black box (I trade <i>discretionary</i> global macro) so my experience here is limited.

My point in the above post was that you can be a successful trader only when you enjoy yourself (and not have soft shit all year round). Everybody is different so scaling in/out and the extent of it depends what your experience tells you what makes you happy (<b>given the implied odds!</b>) Somebody may be less risk averse and let the position run (making the outcome more volatile), somebody value lower volatility of outcomes more and averages up/down.

Personally I like to have core position that I let run and trade around it, i.e. scale in/out as shorter time horizon suggest with keeping some minimum floor position as long as I like the odds. I like to consider this type of trading as kind of psychological insurance - if I scale out and it goes up afterwards I still make some money...

I value interviews with successful traders but I value my experience more than theirs - exactly because it is <b>my</b> experience. I say it because I do not believe in universal truth in life (and therefore in trading).

 

[BlindLemonBoosh]

Quote from Buy1Sell2:

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.

Actually, that's not the case. The question here is whether it makes sense to hold 2 positions having positive expectancy vs. holding one. My point is: two positions will often win on a risk adjusted basis, particularly in situations where correlation is low, EVEN IF ONE EXPECTANCY IS LOWER THAN THE OTHER. Scaling out of the first position to get to this 2 position state is legitimate and prudent trading.

You failed to take risk into account when considering your "thesis".

 

[semiopen]

Haven't read every post here but the sense I get is that there is agreement that scaling out is probably a mistake for an amateur. This is interesting since it is the opposite of what many beginning trading instructors teach.

There is another activity which I think is highly questionable but widely recommended - paper trading.

 

[Buy1Sell2]

Quote from BlindLemonBoosh:

Actually, that's not the case. The question here is whether it makes sense to hold 2 positions having positive expectancy vs. holding one. My point is: two positions will often win on a risk adjusted basis, particularly in situations where correlation is low, EVEN IF ONE EXPECTANCY IS LOWER THAN THE OTHER. Scaling out of the first position to get to this 2 position state is legitimate and prudent trading.

You failed to take risk into account when considering your "thesis".

Again, this is going into a lot more than what I am discussing here. I am discussing whether scaling out is inferior in the context of one instrument, one time frame, one type of signal. I am saying that if you have a signal on a 10 minute chart in ES and that signal runs to a 6 point profit target x percentage of the time, then let it run to that 6 point target, don't pull some of it off at 4 points. This is a failry simple concept and mathematical premise. Don't try to be adding in other variables whether you believe they are there in the real world or not. I am simply saying that if you pull your trades prior to their targets or maturity, then you are engaging in a behavior that is going to be sub optimal with respect to this particular trade. --By the way, if poositive expectancy is greater on a different trade, then you would commit your resources there. The prudent trader is already diversified before coming to the trade---

 

[Buy1Sell2]

Many know that I am in several markets at once and have the majority of my funds elsewhere (not in trading account). Thus, I am a prudent trader who is concerned and plans for risk.

Here is a real life example of my no scale out philosophy:

I have a particular signal in the Euro FX 60 minute chart that nets 60 pips 61% of the time and nets me 82 pips 43 % of the time .

2 contracts using 30 pip stop --no scale out 100 trades

61 winners 60 X 2 X 61 equals 7320 pips
39 losers 30 X 2 X 39 equals -2340 pips Net 4980 pips


43 winners 82 X 2 X 43 equals 7052 pips
57 losers 30 X 2 X 57 equals -3420 pips Net 3632 pips

Ok, now we have determined that we can make money with both , but the 60 pip is more optimal than the 82 pip play. Now, lets look at scaling out versus not scaling out:

We'll pull one contract at 40 pips and let the second run to 60 pips.


Scaling out:
61 winners 1 contract 40 pips equals 2440 pips
61 winners 1 contract 60 pips equals 3660 pips
39 losers 2 contracts 30 pips equals -2340 pips Net 3760 pips

No scale out:
61 winners 60 X 2 X 61 equals 7320 pips
39 losers 30 X 2 X 39 equals -2340 pips Net 4980 pips


By the way, the expectancy for 40 pips is around 65%

Much better by not scaling out . Can you make money scaling out? ---Yes Is it sub optimal/inferior over the long run? --Yes

 

[Buy1Sell2]

Quote from Don Bright:

My 2 cents.

There is no way to predict how far a "profit will run" or how far a loss will go, no crystal balls yet. So, with that in mind, we don't know if we will be able to "buy on pullbacks" after selling everything. And, there is no way to determine the absolute P&L from scaling out.

Bottom line is all that really counts, interesting discussion however.

Don

It is however possible to obtain a probability of how far moves will go over a large sample based upon past history .

 

[Thunderdog]

Quote from Buy1Sell2:

It is however possible to obtain a probability of how far moves will go over a large sample based upon past history .

I love that reference. "Past history." As compared to...future history? Moving right along, I fully agree that you can determine how far moves have gone in the past. And using the curve fitted past as your sample, you can then get hard probability numbers only on that sample. Moving outside of that sample, however, you are confronted not with probability, but uncertainty, which is probability's ugly and slightly incoherent cousin. Therefore, to approach the markets in real time with such complete confidence based on samples of the past is somewhat naive. That is why all-or-nothing thinking when it comes to trading the markets is inappropriate and absolute pronouncements border on the absurd.

 

[Buy1Sell2]

Quote from Thunderdog:

I love that reference. "Past history." As compared to...future history?

Past history is what we have to work with. Markets have patterns that stay intact for very long periods of time. It can be detected if the market is allowing larger or smaller targets as time goes on. It just requires observation and adding further data to the mix to determine when these changes occur. As many know, for the bulk of my trading which is position and swing trading, I use trailing stops outside of noise, so my trading is constantly self adjusting to market conditions and I reap the larger rewards with full position.

 

[Buy1Sell2]

I would mention here that since the initiation of this thread, I have decided that I was wrong to scale into trades. That is an inferior behavior as well. I have been making money with it for over a quarter of a century, but it is sub optimal and I will not be doing it anymore. Full position should be taken initially and full position should be exited. --The problem with the scale in strategy lies in the fact that there are times when the markets goes in your direction right away and you have a small position on. That's ok for 401 k'ers but not taders.

 

[taowave]

Quote from Buy1Sell2:

I would mention here that since the initiation of this thread, I have decided that I was wrong to scale into trades. That is an inferior behavior as well. I have been making money with it for over a quarter of a century, but it is sub optimal and I will not be doing it anymore. Full position should be taken initially and full position should be exited. --The problem with the scale in strategy lies in the fact that there are times when the markets goes in your direction right away and you have a small position on. That's ok for 401 k'ers but not taders.

may i ask what software you are using to perform you backtesting and WFA?