"Scaling out" is inferior behavior

[Overnight]

Quite an old thread we're talking about here, but I guess it is still relevant.

Scaling into a winner is just as risky as averaging down, or whatever terminology you wish to use.

Averaging down...

Your have one share/contract at 100 dollars. It moves to 90. You are down 10 bux because your position is now at 90. You add one share at 90, and so your average cost per share is now 95 bux. So you have one share that has lost 10 bux, and one share that is flat. So at 90 bux per share you are down 10 bux. The price moves to 95 bux, and now your position is break even, because your one share is down 5, but your other share is up 5. If it goes to 100 bux, you are break even on one share, but up ten on the other share, so you made 10 bux.

THIS CAN GO THE OTHER WAY!

Scaling up...

You have one share/contract at 100 dollars. It moves to 110. You are up 10 bux because your position is now at 110. You add one share at 110, so your average cost per share is 105. So you have one share that gained 10 bux, and one share that is flat. If the price drops back to 105, you lost 5 bux on the share at 110, but gained 5 bux on the share at 100. So break even.
If the price drops back to 100, you break even on the 100 share, but lost 10 bux on the 110 share.

In the end, this all really comes down to intraday-trend following methinks. Scaling up or averaging down is only for people who have a singular grasp on the intraday movements and a shitload of money, because trying to swing with scaling is bad juju unless it's coming with some crazy spread margin discount

 

[bone]

Scaling - in to and unto itself, is not an “edge” per se.

I scale profits as well - but I take my losers all at once. Which is another great conversation starter!

 

[deaddog]

@bone
Can you walk us through your process of scaling profit?
Mine is to take 1/3 into strenght, 1/3 on a trend break and the last on a MA break.

 

[Newc2]

Scaling up...

You have one share/contract at 100 dollars. It moves to 110. You are up 10 bux because your position is now at 110. You add one share at 110, so your average cost per share is 105. So you have one share that gained 10 bux, and one share that is flat. If the price drops back to 105, you lost 5 bux on the share at 110, but gained 5 bux on the share at 100. So break even.
If the price drops back to 100, you break even on the 100 share, but lost 10 bux on the 110 share.

Instead you buy 2 contracts/shares at $100. It drops to $90. Congrats. You‘ve now lost $20 instead of $10 by scaling in as per your example of why it’s the wrong thing to do.

The game is risk management first and foremost. Greater profits can be had by increasing size once you have to risk side managed.

 

[Overnight]

Instead you buy 2 contracts/shares at $100. It drops to $90. Congrats. You‘ve now lost $20 per contract/share instead of $10 by scaling in as per your example of why it’s the wrong thing to do...

Huh? Are people in the world just bad at math? What did that guy say that was different from what I said?

 

[bone]

You’ve got a fine plan, tbh.

If, for example, I’m short 3 futures contracts, I might place three single separate buy orders at three different levels around (above and below) a recent swing low. That way, if the market bounces back, I possibly stood a better chance of being able to book some profit.

More importantly - I never scale out of losers. I get out completely with a stop limit order as soon as my indicator package flips over on me. The conditions for being in the trade are no longer valid - I rip the bandaid off, forget about it, and look for the next opportunity.

Taking a good clean quick loss is the mark of an exceptional trader, IMO.

@bone
Can you walk us through your process of scaling profit?
Mine is to take 1/3 into strenght, 1/3 on a trend break and the last on a MA break.

 

[longandshort]

I have weight thresholds in my portfolio. E.g. active risk on a trade is a 2% weight of gross. Can increase by 1% increments up to a max weight of 8%, though 5% is “high conviction”. I don’t change that weight threshold unless my thesis breaks. Weights change if conviction changes (typically data supporting the trade).

E.g. I buy ABC because I think it will beat earnings this quarter and assign it a 2% weight. I usually vwap through the day (algo) and moc everything else, depending on a variety of factors. If there’s a conference and I see that my estimate for the stock moves higher, I have the option to increase my % weight. After earnings I’ll generally exit the position, usually a moc or vwap depending on liquidity, either with a profit or loss.

The only times I scale in are when there’s extremely high volatility or when my order size is above a certain threshold of adv. Scaling beyond that doesn’t make sense, and can mean you don’t have conviction or know what drives your trading.

 

[bone]

I admire any trader with a well thought out system and that sticks to it.

I have weight thresholds in my portfolio. E.g. active risk on a trade is a 2% weight of gross. Can increase by 1% increments up to a max weight of 8%, though 5% is “high conviction”. I don’t change that weight threshold unless my thesis breaks.

E.g. I buy ABC because I think it will beat earnings this quarter. After earnings I’ll generally exit the position, either with a profit or loss. The only times I scale in are when there’s extremely high volatility or when my order size is above a certain threshold of adv. Scaling beyond that doesn’t make sense, and it can mean you don’t have conviction or know what drives your trading.

 

[Buy1Sell2]

50 % winning percentage 4 ES Contracts 20 trades 2 pt target 2 pt loss

1st example without scaling out

10 winners 2X(4 Contracts) = $80 pts ($4000)
10 losers 2X(4Contracts) = $80 pts (-$4000)
Net profit 0 before commissions


2nd example with scaling out half at 1 pt
5 winners 2X(4 Contracts) =40 pts ($2000)
5 winners 1X(4 Contracts) =20 pts($1000)
10 losers 2X(4 Contracts) = -80 pts (-$4000)
Net loss before commissions=-$1000

 

[Newc2]

The only times I scale in are when there’s extremely high volatility or when my order size is above a certain threshold of adv. Scaling beyond that doesn’t make sense, and can mean you don’t have conviction or know what drives your trading.

I think you miss the point about scaling into winning positions. It can provide better risk adjusted returns. Conviction has nothing to do with this.