"Scaling out" is inferior behavior

[Buy1Sell2]

As there has been no sign of any meaningful evidence to refute my proven assertion, the proof phase of this thread is now complete.
What has been shown is A) all in all in out performs in a superior fashion to scaling on all time frames. B) Even losing systems (in fact ALL systems) benefit from all in all out style trading.
--Proof phase now complete--

Time to move on to some further considerations with regards to this subject and I will begin with the first item in the next post.--Ishmael

 

[Buy1Sell2]

The next consideration that must be looked at is the number of times a trader makes decisions. The more decisions that a trader makes, the more chances he will have to be wrong. Traders are more likely to make decisions that are incorrect, thus it is important to keep the number of decisions to a minimum. Each time there is an entry or exit, this represents a decision that is being made by the trader. Scaling requires more entries and more exits and thus creates a greater potential for incorrect entries and exits. It is best to avoid this and the all in/ all out style limits the chances for bad decisions. Good trading everybody!--Ishmael

 

[FanOfFridays]

Quote from Buy1Sell2:

As there has been no sign of any meaningful evidence to refute my proven assertion, the proof phase of this thread is now complete.
What has been shown is A) all in all in out performs in a superior fashion to scaling on all time frames. B) Even losing systems (in fact ALL systems) benefit from all in all out style trading.
--Proof phase now complete--

If anything has been proven in this thread, it is the following

1. Scaling out is an effective trade management strat in many situations, especially those which involve legging in

2. There has been not one shred of empirical proof for the OP's assertion. The only proof of the OP's assertion that scaling out is inferior behaviour is the following statement

"Scaling out is inferior behaviour"

It would be clear to most people that this doesn't constitute proof.

3. The central tenet of this thread, that the optimal exit point for a trade can be determined before the trade is placed has been unequivocally shown to be a load of hogwash. If there is no proof for the title assertion, there has not even been an attempt to prove this howler.

It is heartening to see that the OP has backed off from his claim the the duration of a future price move can be determined through backtesting, a bizarre idea even for these boards.

4. This thread should serve as a warning to beginners who make the mistake of believing that there os a one-size-fits-all approach to trade management.

5. In the end, this thread proves only one thing. The Holy Grail in trading is price action. All decisions should be made with a healthy respect for it. If a trade is initiated and price action shows that the conditions which obtained when the trade was place have changed, the trader must adapt. Often this involves lightening up and moving stops up.

We will continue to post the facts while leaving rash generalizations and theory-based presumptions to the theorists.

 

[FanOfFridays]

In order to properly assess the content in this thread and the OP's assertions, it will be very instructive to go back to the first days and to see what kind of comments were being made by the OP at that time. How can we rate this individual's credibility? One way is to go back and see what he has actually stated as his opinion.

In the days and weeks to come and as time permits I will go back and search out some of the more relevant posts made by the OP and post links. It shouldn't take too long before a pretty consistent picture emerges.

Here is the first

Quote from Buy1Sell2:
I view daytrading and trading at the open as inferior behavior as well.

http://www.elitetrader.com/vb/showthread.php?s=&postid=1236290#post1236290

 

[FanOfFridays]

It is truly instructional to look back at the first hundred or so posts in thsi thread. All the rational objections to the OP's unfounded assertions were made in 2006. The OP had no way to counter these facts.

Here are a couple of posts which deal effectively with just one aspect of the flaws in the OP's assertio.

Quote from illiquid:

Nice post GTS.

I would just add that, although I agree that in general "numbers don't lie", backtests and average amounts are always moving with the next trade, and CAN lie, or at least prove deceptive.

The big mistake buy1sell2 makes is that he assumes scaling out will always prematurely exit a position, versus a full exit. This is true only in hindsight, comparing the scaled exit to an "optimal" exit. But in real-time, in real trades, scaling will sometimes keep you in the trade longer than you normally would, which is something Thunderdog alluded to. Scaling out is always inferior to the "optimal" figure, but the optimal is just a "theoretical" number -- this doesn't hold in real-time.

Say, based on backtested figures, you've found that an "optimal" target will net you 3 points on average for method X, based on a past series of trades; over the same time frame, scaling out only nets you 2. However, let's say for the next Y number of trades, the ranges widen quite a bit for method X -- scaling out leaves you in the trade longer, and therefore for those trades you've netted an average of 6, while your "optimal" exit yields just 3.5 for the new series.

Now, if you backtest with the new information you receive with the second series of trades, you will find that a new "optimal" target will net you 4.5 points, while scaling overall yields 4. The difference here is this: the 4 points on avg for scaling is an actual figure that you would have received for all trades; the 4.5 points for the "optimal" target is just a theoretical figure which has been adjusted for the new series -- you still only get 3.5 for using the "optimal" target from the first series. Optimal is only optimal in hindsight, and comes down to how quickly you can adapt that figure for incoming trades. It's quite possible that scaling out will yield a greater profit overall -- at least a profit more "reflective" of current conditions -- while an optimal figure can move quite slowly, depending on how many trades are used as history/how fast conditions have shifted.

edit: the converse example for a deteriorating method "X" would probably be more realistic and to the point -- that is, a method whose optimal target is progressively smaller. If method "X" began as a very high yield setup, say given for a high volatility market, but deteriorates as volatility contracts, you would see a far greater "real-time" difference in results between a scaled exit versus an "optimal" exit -- meaning, the prior higher "optimal" exit might yield 0 or worse, as opposed to an "updated" optimal figure.

Quote from illiquid:

[This assertion] a natural one coming from a position trader who disdains intraday trading. By definition, he will always be going for the home run, as opposed to daily singles and doubles. But to make a blanket statement that scaling is inferior is a pretty dubious one. If you were a position trader in the dollar for the past six months, you'd be tearing your hair out from the tight range and constant pullbacks we've had compared to the first quarter of the year. And if I came along and said "position trading is a waste of capital, you miss out on all the inbetween back-and-forth -- you need to maximize your returns by trading the intraday moves as well", that doesn't mean anything at all. Scaling out also doesn't necessarily mean timidly selling partials just to get comfortable, it can also be a part of an extremely aggressive strategy of squeezing every little bit out of a major move -- getting out, getting back in, repeat. Go ask a trader like Tom Baldwin how he feels about hitting home runs, or trying to hold through all the "big moves with a full boat" -- it just doesn't fit everyone's style, nor does it fit every market and market condition.

If all b1s2 is saying is that for position traders like himself, a few big trades are where most of your profits are going to come from, I have no disagreement. But it's all relative what a "home run" is, and for some alot of singles over time can add up to more than a few home runs. A wonder what a few qualifiers can do.

http://www.elitetrader.com/vb/newreply.php?s=&action=newreply&postid=1238772

 

[FanOfFridays]

Even more interesting facts are emerging!

The OP is a apparently a failed daytrader, someone who could not figure out daytrading. Over the years we have seen that there is a certain type of individual who maintains the following mindset:

"If I can't do it, it means it can't be done at all".

Now, of course this is laughable. But it does give us some insight into the OP's mind. We are not dealing with someone with a flexible mind here. We are dealing with someone who would rather stick his head in the ground than face the facts. This type of person will add to a losing position, stubbornly maintaining his belief, until he either goes broke or is stopped out for a huge loss. They do not do well in situations which require them to change their opinions suddenly when faced with new evidence.

No wonder the OP claims that scaling out is inferior!!

Quote from Spooz Top:
b1s2.........you're not qualified to make that determination being that you are not a successful intra day trader...........as a matter of fact ,you failed miserably in [your thread] about your "epiphany" on why you stick to position trading.......because of your failure to trade intra day successfully.
perhaps your failure is due to the fact you refuse to open your mind & your stubbornness interfered with an intra day approach, such as scaling, to become successful intra day trader.

http://www.elitetrader.com/vb/showthread.php?s=&postid=1238907#post1238907

 

[BostonTrader339]

yes, well time and capital will run out on them, this lesson is just many we all learn from the beginning.

failure is not exclusive to geniuses.

neither is ignorance nor arrogance.

especially from those before us who've forgotten they too were naive fools once.

knowledge is learned, not inherited.

Quote from traderNik:

Even more interesting facts are emerging!

The OP is a failed daytrader, someone who could not figure out daytrading. Over the years we have seen that there is a certain type of individual who maintains the following mindset:

"If I can't do it, it means it can't be done at all".

Now, of course this is laughable. But it does give us some insight into the OP's mind. We are not dealing with someone with a flexible mind here. We are dealing with someone who would rather stick his head in the ground than face the facts. This type of person will add to a losing position, stubbornly maintaining his belief, until he either goes broke or is stopped out for a huge loss. They do not do well in situations which require them to change their opinions suddenly when faced with new evidence.

No wonder the OP claims that scaling out is inferior!!


http://www.elitetrader.com/vb/showthread.php?s=&postid=1238907#post1238907

 

[Buy1Sell2]

The second consideration in this phase of the thread is something called "Reverse Position Sizing" Here is a link to a very good article concerning this very concept. For those who don't wish to visit the site, I am posting the article here for you to read.

http://www.rightline.net/education/battle-of-exit-strategies.html


"Simple concepts usually work best in trading - especially when it comes to Exits. However, keeping it simple doesn't exclude Exit plans with several features - so long as each aspect is designed to accomplish a goal.
For example, every Exit Strategy should do three things - minimize losses, maximize profits, and limit the amount of profit you give back. You can minimize losses with an initial "sell-all" stop that protects you if the trade moves in the wrong direction, maximize profits with a "sell-all" trailing stop that allows for normal price fluctuations, and avoid giving back too much profit by tightening the trailing stop when you reach a certain profit target.

While this three-pronged approach specifically addresses each objective, one widespread strategy used by many traders does just the opposite. The basic idea is to exit your position in several planned increments as opposed to exiting the entire position at one time. This strategy is sometimes referred to as "Scaling Out." Like the first example it uses multiple features. However, instead of meeting the three objectives of any good Exit plan, it works against them. Here's how.

Lets say you open a position with 600 shares. Under the Scale Out plan you might sell 1/3 of them when you reached the break-even point for the trade. Then you would sell another third when you made a specific profit such as $1000. Then you might hold on to the remaining shares until you have a $2000 profit, or keep the position even longer and let the price run way up.

Although the Scale Out method is commonly thought to reduce losses and increase profits, it has the unfortunate quality of producing big losses and little profits. This is due to a not-so-obvious characteristic - Reverse Position Sizing.

Position Sizing protects you by limiting the amount of shares held when you are the most vulnerable. This reduces the total amount of loss. On the other hand, the Scaling Out exit plan guarantees that you will have the most shares in your position when your risk of loss is highest. This trait will quickly increase your losses.

Not only does Scaling Out increase your losses, it insures that you have the fewest shares in your position when your point gains are the highest. Instead of "locking in profits" as it first appears, scaling out locks in larger losses than if you exited your entire position at one time.

Bottom Line: Though Scaling Out is popular among traders, the defects in this Exit Strategy cause hidden damage to trading accounts. Intuitively it seems to be a clever thing to do, yet when you take a closer look you can see that it is quite destructive.

By the way - don't feel bad if you use the Scale Out method - at least you have an Exit Strategy. That fact alone puts you in the top 20% of all traders. I confess that I believed in this method for a long time because it seemed to make sense.

Oh well, live and learn!"


Ishmael

 

[FanOfFridays]

Quote from Buy1Sell2:
Lets say you open a position with 600 shares. Under the Scale Out plan you might sell 1/3 of them when you reached the break-even point for the trade. Then you would sell another third when you made a specific profit such as $1000. Then you might hold on to the remaining shares until you have a $2000 profit, or keep the position even longer and let the price run way up.

There's nothing like a well-chosen example.

In this quote, the author talks about putting a position on and taking 1/3 off at the break-even point. B1S2 is using this as 'evidence' (and I use that term extremely loosely) of his mistaken hypothesis, that is that scaling out is always sub-optimal.

We don't need to look any further than this to get an idea of the intellectual rigour with which the OP constructs his 'arguments'.

Why would anyone take 1/3 off at the breakeven point if the initial reasons for placing the trade still seemed valid?? No one who has objected to the blanket statements by the OP has said that scaling out should start to occur at the break-even point simply because it's the break-even point. What does B1S2 think those who scale out do? Attempt to get filled at b/e in a market that is stampeding in their direction?

Citing the quote above is like saying 'Scaling out is always sub-optimal because traders who don't know what they're doing sometimes scale out'.

This is a ridiculous example, and carries no weight whatsoever. The more we hear from this member, the more we see that his arguments are based on nothing but opinion, and wrongheaded opinions at that.

Scaling out is the optimal strat in various trading situations. Beginners should be aware that blanket statements and rigid thinking should be filtered out. Price action is the best thing upon which to base trade decisions.

 

[volente_00]

Quote from traderNik:

There's nothing like a well-chosen example.

In this quote, the author talks about putting a position on and taking 1/3 off at the break-even point. B1S2 is using this as 'evidence' (and I use that term extremely loosely) of his mistaken hypothesis, that is that scaling out is always sub-optimal.

We don't need to look any further than this to get an idea of the intellectual rigour with which the OP constructs his 'arguments'.

Why would anyone take 1/3 off at the breakeven point if the initial reasons for placing the trade still seemed valid?? No one who has objected to the blanket statements by the OP has said that scaling out should start to occur at the break-even point simply because it's the break-even point. What does B1S2 think those who scale out do? Attempt to get filled at b/e in a market that is stampeding in their direction?

Citing the quote above is like saying 'Scaling out is always sub-optimal because traders who don't know what they're doing sometimes scale out'.

This is a ridiculous example, and carries no weight whatsoever. The more we hear from this member, the more we see that his arguments are based on nothing but opinion, and wrongheaded opinions at that.

Scaling out is the optimal strat in various trading situations. Beginners should be aware that blanket statements and rigid thinking should be filtered out. Price action is the best thing upon which to base trade decisions.

The only thing I can figure from the example is that the author was assuming they had scaled into a losing position to build the original. Something that I will never advocate.