"Scaling out" is inferior behavior

[Newc2]

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

Your example is flawed.

Price has less chance of reaching the full target. So scaling out may result in a lower % gain per trade. However it will results in a higher win %.

If anything, scaling out is a net zero financial benefit but with greater psychological benefits as well as a smoother equity curve which is very beneficial for those of us trading for income.

 

[deaddog]

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.

Not sure I understand 2% wieght by gross. Is this 2% of the total portfolio?
How does this wieghting work when you are hedging positions?

 

[longandshort]

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.

Want to show me your source?

I understand delta management to replicate the payoff of a call option, but you must define how much weight in your portfolio you’re willing to allocate to any one position in the first place.

My position thresholds define that, and as portfolio mix ebbs and flows, maintaining a fixed weight means I am adding/reducing based upon what’s happening globally.

But maybe we’re talking semantics. Adding to winners is good, reducing losers is good. But scaling implies something else, imo.

 

[Buy1Sell2]

Your example is flawed.

Price has less chance of reaching the full target. So scaling out may result in a lower % gain per trade. However it will results in a higher win %.

If anything, scaling out is a net zero financial benefit but with greater psychological benefits as well as a smoother equity curve which is very beneficial for those of us trading for income.

The example is not flawed, but I agree with the rest of the statements you made. Scaling in and out is inferior to all in all out methods in terms of actual gain over the long haul.

 

[longandshort]

Not sure I understand 2% wieght by gross. Is this 2% of the total portfolio?
How does this wieghting work when you are hedging positions?

It means the net weight of a single name might be less than 2% depending on what I need to do to hedge. The more volatile the position the more hedging it needs.

 

[deaddog]

But maybe we’re talking semantics. Adding to winners is good, reducing losers is good. But scaling implies something else, imo.

What's your understanding of scaling.
Mine is to add to positions that are moving in my favor.

 

[longandshort]

What's your understanding of scaling.
Mine is to add to positions that are moving in my favor.

Scaling in implied you go smaller first, right? That’s the way I interpret it. E.g. you want a 2% allocation and you start with 0.5%.

 

[deaddog]

Scaling in implied you go smaller first, right? That’s the way I interpret it. E.g. you want a 2% allocation and you start with 0.5%.

That's how I see it. We probably disagree on adding to a winning position vs averaging down. I assume that with fundamental analysis if you like a stock you will add if the price drops. (everyone likes a sale). In my case I just take a small loss and wait for another set up.
Different strokes; no one is wrong.

 

[longandshort]

That's how I see it. We probably disagree on adding to a winning position vs averaging down. I assume that with fundamental analysis if you like a stock you will add if the price drops. (everyone likes a sale). In my case I just take a small loss and wait for another set up.
Different strokes; no one is wrong.

Well if you want to buy a stock I assume you think the price will go up right? Why wouldn’t you buy now?

 

[deaddog]

Well if you want to buy a stock I assume you think the price will go up right? Why wouldn’t you buy now?

I do. I scale in because I want to limit my risk. If it goes up I'll add, if it goes down I'll take a small loss.