"Scaling out" is inferior behavior

[powerfade]

Quote from Buy1Sell2:
Bottom line--It is possible to determine the optimal exit on trades using volatility, average true range and backtesting.

It is truly the case that those who fail to learn from history are doomed to repeat it. The market action over the past year has shown us clearly that it is impossible to determine with anything approaching absolute certainty the extent of a price move using such things as ATR, vol and, of all things, backtesting, which is about as useless in determining future direction as a crystal ball. It's especially funny to read statements like this when the markets have just given us one of history's biggest examples of this idea being dead wrong!

Beginning traders here at ET often post in a manner which indicates that they have not yet understood that trading is a probability game and has nothing whatsoever to do with determining that this or that is going to happen. The OP provides a good example of that type of mindset.

It is often the case that theoreticians with a certain degree of intellectual arrogance post in a manner such as what we see with the OP.

Those who have examined thousands upon thousands of trades have a large enough sample to know that it is patently false that the optimal exit point can be predetermined. Any beginners reading this thread should be warned that following the OP's advice may lead to sub-optimal trading performance.

 

[sosueme]

Quote from powerfade:



The inescapable conclusion is that the OP does not actually trade. He may be a university economics student or just someone with a mathematical bent who enjoys studying the markets.

You are dead right, of course the OP does not trade as is evidenced by his postings.

He does provide some ET humor and so all is not lost.
When a paper trader (or more accurately) a hindsight trader kicks into gear with untested words of wisdom I just about fall off my chair with laughter.

sosueme

 

[Buy1Sell2]

Quick reminder example of what we are talking about here:

---Trader decides that the optimal exit for him is a 3 to 1 reward to risk ratio using a 2 point stop. He has spent quite a bit of time determining this through volatility analysis, true range , backtesting, account size etc. The trader should then allow the trade to move fully to the 6 point target and remove all positions there. He should not remove any positions at 4 or 5 points. --It just doesn't make sense--- Furthermore, if he decides to leave some of the position on (scaling out), then he should really leave the whole position on for the further gain. Personally, I only use trailing stops and I don't use targets, but either way, the trade is best left on for full position--Good trading to all --Ishmael

 

[FanOfFridays]

Quote from Buy1Sell2:

Quick reminder example of what we are talking about here:

---Trader decides that the optimal exit for him is a 3 to 1 reward to risk ratio using a 2 point stop. He has spent quite a bit of time determining this through volatility analysis, true range , backtesting, account size etc. The trader should then allow the trade to move fully to the 6 point target and remove all positions there. He should not remove any positions at 4 or 5 points. --It just doesn't make sense---

To any beginners reading these posts from the OP, please understand that his statements are based on the mistaken assumption that one can determine the optimal exit point for a trade at the time the trade is placed. Of course, as anyone who has traded real money knows, this is the farthest thing from the truth. It is impossible to determine in advance the extent of any move in any market.

The only way to trade is to trade price action, which is the opposite of the approach described in the statement above, in which one determines an exit point before the trade is entered, makes decisions based on theory, and stubbornly refuses to adapt as the trade evolves.

Trading success occurs at the intersection of preparation and the deployment of skills learned the hard way. Theoreticians and academics like to make statements like 'the optimal exit point for any trade can be determined through volatility analysis and backtesting' (and of all the assertions made by the OP, the idea that one can determine the optimal exit point for any trade through backtesting is the most bizarre). Real traders laugh at such statements and continue to make their money by trading price action.

To suggest that there is a one size fits all approach to trading is to admit that one does not trade real money. There are so many different ways to trade and scaling out will sometimes be optimal and sometimes it won't be. This is self-evident to all but the theoreticians who haven't understood how many different systems can be used to trade.

 

[Buy1Sell2]

Quote from traderNik:

To any beginners reading these posts from the OP, please understand that his statements are based on the mistaken assumption that one can determine the optimal exit point for a trade at the time the trade is placed.

No. I say that an optimal exit can be determined for each trade, but some will go farther and some will not go as far. The optimal exit is calculated as the optimal percentage of the time that it goes x far with x being at the optimal percentage. Then, regardless of whether or not it exceeds the target or falls short, we take the whole position off at the same time, knowing that over the long haul we will be better off. This is not a strategy to manage one individual trade, rather it is a strategy to manage an entire career of trades. Very easy concept to grasp, but emotions and ego prevent most from admitting the beauty in the simplicity. --Now one more time, I will mention, that I do not use targets, but I do use trailing stops. Good trading to all-- Ishmael

 

[Buy1Sell2]

By the way, the whole irony of the discussion is that those traders arguing against the calculation of the optimal exit point are most likely the same traders who use profit targets. Surely, those folks are attempting to calculate the optimal target when they place their exit order for it would be foolish to just arbitrarily establish an exit point. --Ishmael

 

[Thunderdog]

Quote from Buy1Sell2:

No. I say that an optimal exit can be determined for each trade, but some will go farther and some will not go as far...

Isn't it time for this thread to be put out of its misery (and mine) and relocated to Chit Chat?

 

[FanOfFridays]

Quote from Buy1Sell2:

No. I say that an optimal exit can be determined for each trade, but some will go farther and some will not go as far.

There is no such thing as an 'optimal exit point' for any trade. The only 'optimal exit point' is the point at which your stop loss is triggered.

It is a truism in trading (at least among people who trade real money), that entries matter little compared to exits. Although this assumes that one is able to avoid the basic beginner entry errors, the truth in it is well known. The art of trading is in exiting. There are so many different ways to trade, so many different approaches to the market, that to say 'this is the only way one should trade' is foolish and naive. Again, it is the type of statement that we see from academics and theoreticians, not people who have actually traded the markets.

The statement that 'the optimal exit point can be determined before each trade' is the precise opposite of the statement that 'the only way to trade is to observe price action'.

Once again, beginners reading this thread should understand that there is no way to determine the optimal exit point or the extent of a price move on any trade. In addition, the idea that one can determine these things by 'backtesting' is particularly dangerous.

 

[Buy1Sell2]

Thunderdog, the recommendation for you is to exercise your option to not read the thread. The information provided by me and several others in the thread is very viable and some may find it useful, so to get rid of the thread could be counterproductive. --Ishmael

 

[Buy1Sell2]

Quote from traderNik:

There is no such thing as an 'optimal exit point' for any trade.

This is false of course, but I point out again that I use trailing stops or obvious exit signals and not targets anyway.