"Scaling out" is inferior behavior

[Hook N. Sinker]

I suspect all of you are correct. Much depends on the continuation of the trend. If I trade a security that shows a long continuing trend then holding the entire position from entry to exit makes more money. Lots of securities show shorter trends. It's the shorter trending securities that show better performance with scaling out methods.

I'm working on some computer code to model scaling out trading methods and compare them to, say, a moving average crossover method.

 

[whitster]

index futures TEND to be (although recently volatility and "trendiness" has spiked) means reversion instruments

this partly has to do with arbs, and there are a # of other reasons.

in a market like that (where i make my living) scaling out makes excellent sense. it also smooths the equity curve (SIGNIFICANTLY)

trading is not just about optimal gains. its about risk adjusted gains, and taking into account - volatility, etc.

nobody KNOWs what the market will do. that's part of the reason why i scale out. in the current environment, i have significantly INCREASED my primary, secondary, and tertiary targets, because the intraday swings have gotten larger. but going all or nothing on (especailly a distant) does not make sense FOR ME in the market I TRADE with my RISK TOLERANCE, my goals (current income) ,etc. its optimal for me.

i wouldn't deign to say scaling out is better or worse for others because there are too many factors that vary from trader to trader

fwiw, in INVESTING i almost never scale out. i hold. been holding AAPL since i started investing. occasionally i will buy protective puts and/or sell covered calls and buy free puts with the premium

sometimes that works out well, sometimes not so much but it depends on way too many factors to say whether it is "inferior" or superior to scale out.

simply put: it depends

 

[Hook N. Sinker]

This compares two variations of exponential moving average crossover system. System 14 is a long position only exponential moving average crossover system, system 20 is also a long position only exponential moving average crossover system but sells half the position for a 20 % profit and the other half when the fast moving average value is less than the slow moving average value.

The daily stock price data used in this model is Allergan stock symbol AGN 16.86 years from 22 June 1989 to 12 May 2006. Heat is 4 %. Initial capital $ 100000. I observe an optimum CAGR / greatest draw down ratio for both systems using time constants of 40 and 90 days.

Trading results summary:

System 14
long position only exponential moving average crossover system

Number of trades 7
Total profit $ 212296
Profit after subtracting $ 10.00 commission, slippage per transaction: $ 212156
Greatest draw down is 0.0487 (4.87 per cent).
Cumulative Annual Growth Rate (CAGR) is 12.58 per cent.
CAGR / greatest draw down is 2.58
Instantaneously Compounding Annual Growth Rate (ICAGR) is 6.75 per cent.
Annually Compounding Annual Growth Rate (ACAGR) is 6.98 per cent.
Information Ratio is 0.54

system 20
long position only exponential moving average crossover system
with partial exit at 20 % profit

Number of trades 11
Total profit $ 113084
Profit after subtracting $ 10.00 commission, slippage per transaction: $ 112864
Greatest draw down is 0.0487 (4.87 per cent).
Cumulative Annual Growth Rate (CAGR) is 6.69 per cent.
CAGR / greatest draw down is 1.37
Instantaneously Compounding Annual Growth Rate (ICAGR) is 4.48 per cent.
Annually Compounding Annual Growth Rate (ACAGR) is 4.58 per cent.
Information Ratio is 0.47

This data suggests that the single entry single exit system shows greater profit than the partial exit system. Volatility (greatest draw down or information ratio) is about the same value in both systems.

 

[Hook N. Sinker]

I select the Standard And Poors 500 index tracking stock symbol SPY for this test using the same two variations of exponential moving average crossover system as above. Since the Standard And Poors 500 index is a composite of prices of 500 stocks I expect price behavior to be less trending than that of Allergan Corporation stock. If price behavior is less trending then I expect the exponential moving average crossover system with partial exit to show greater profit and lesser draw down than the exponential moving average crossover single entry single exit system.

Using 13.54 years daily SPY price data, from 29 January 1993 to 22 August 2006, 3 % heat, optimum time constants of 20 and 70 daily intervals I obtain these results:

System 14
long position only exponential moving average crossover system

Number of trades 8
Total profit $ 177602
Profit after subtracting $ 10.00 commission, slippage per transaction: $ 177442
Greatest draw down is 0.0107 (1.07 per cent).
Cumulative Annual Growth Rate (CAGR) is 13.11 per cent.
CAGR / greatest draw down is 12.23
Instantaneously Compounding Annual Growth Rate (ICAGR) is 7.54 per cent.
Annually Compounding Annual Growth Rate (ACAGR) is 7.83 per cent.
Information Ratio is 0.51

system 20
long position only exponential moving average crossover system
with partial exit at 5 % profit

Number of trades 13
Total profit $ 90573
Profit after subtracting $ 10.00 commission, slippage per transaction: $ 90313
Greatest draw down is 0.0107 (1.07 per cent).
Cumulative Annual Growth Rate (CAGR) is 6.67 per cent.
CAGR / greatest draw down is 6.22
Instantaneously Compounding Annual Growth Rate (ICAGR) is 4.75 per cent.
Annually Compounding Annual Growth Rate (ACAGR) is 4.87 per cent.
Information Ratio is 0.40


Again, this data suggests that the single entry single exit system shows greater profit than the partial exit system. Volatility (greatest draw down or information ratio) is about the same value in both systems.

MGJ reports test results for a futures trading model, this work tests stock trading models. The results do not agree. Could there be a significant difference in trend behavior of stock prices compared to the trend behavior of futures prices? Could differences in trading method account for the difference between MGJ's results and these exponential moving average crossover system results?

I need more time to validate my computer program for futures trading.

 

[thenewguy]

Quote from Hook N. Sinker:

I select the Standard And Poors 500 index tracking stock symbol SPY for this test using the same two variations of exponential moving average crossover system as above. Since the Standard And Poors 500 index is a composite of prices of 500 stocks I expect price behavior to be less trending than that of Allergan Corporation stock. If price behavior is less trending then I expect the exponential moving average crossover system with partial exit to show greater profit and lesser draw down than the exponential moving average crossover single entry single exit system.

Using 13.54 years daily SPY price data, from 29 January 1993 to 22 August 2006, 3 % heat, optimum time constants of 20 and 70 daily intervals I obtain these results:

System 14
long position only exponential moving average crossover system

Number of trades 8
Total profit $ 177602
Profit after subtracting $ 10.00 commission, slippage per transaction: $ 177442
Greatest draw down is 0.0107 (1.07 per cent).
Cumulative Annual Growth Rate (CAGR) is 13.11 per cent.
CAGR / greatest draw down is 12.23
Instantaneously Compounding Annual Growth Rate (ICAGR) is 7.54 per cent.
Annually Compounding Annual Growth Rate (ACAGR) is 7.83 per cent.
Information Ratio is 0.51

system 20
long position only exponential moving average crossover system
with partial exit at 5 % profit

Number of trades 13
Total profit $ 90573
Profit after subtracting $ 10.00 commission, slippage per transaction: $ 90313
Greatest draw down is 0.0107 (1.07 per cent).
Cumulative Annual Growth Rate (CAGR) is 6.67 per cent.
CAGR / greatest draw down is 6.22
Instantaneously Compounding Annual Growth Rate (ICAGR) is 4.75 per cent.
Annually Compounding Annual Growth Rate (ACAGR) is 4.87 per cent.
Information Ratio is 0.40


Again, this data suggests that the single entry single exit system shows greater profit than the partial exit system. Volatility (greatest draw down or information ratio) is about the same value in both systems.

MGJ reports test results for a futures trading model, this work tests stock trading models. The results do not agree. Could there be a significant difference in trend behavior of stock prices compared to the trend behavior of futures prices? Could differences in trading method account for the difference between MGJ's results and these exponential moving average crossover system results?

I need more time to validate my computer program for futures trading.

I think the argument is to take partial profits at profit target, not before.

TNG

 

[Muskoka Joe]

When you scale out you are essentially trading different trading systems. Each system must stand on its own --- not as part of a whole--- to argue it is best to scale out. When it does hold true then the discussion can proceed.

Given that, the original poster is essentially arguing that larger profit targets will produce larger total returns then smaller profit targets. How do you need 150 pages to argue that? It will almost always be true.

However by default it also argues that optimizing performance based on total returns is the only correct way to trade. Hence optimizing based on drawdown would be incorrect. How can one argue that as incorrect? Risk adjusted return is really the essence of institutional trading.

 

[horribilicus]

Hook N, the comparison you're trying to make is just plain retarded.

(90 futures symbols, 418 months, 1300 trades)

vs.

(1 stock symbol, 202 months, 11 trades)


Simply ridiculous.

 

[Buy1Sell2]

I continue to hold Long Yen futures, Long Swiss Franc Futures, Long Euro FX, Long Natural Gas Futures, Long Gold Futures. Long 10 yr note Futures, Long Cotton Futures , Long Coffee Futures and short ES. I hold these at full position and have not scaled out.

 

[GTS]

Quote from Buy1Sell2:

I continue to hold Long Yen futures, Long Swiss Franc Futures, Long Euro FX, Long Natural Gas, Long Gold. Long 10 yr note Futures, Long Cotton Futures , Long Coffee Futures and short ES. I hold these at full position and have not scaled out.

You are a God.

 

[Buy1Sell2]

Quote from GTS:

You are a God.

No Sir.

I am human, but I do know the proper way way to trade and that is to cut losses short and ride winners with full position on.