"Scaling out" is inferior behavior

[longandshort]

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.

Yeah, that speaks to your conviction. I trade early and aggressively or my edge decays.

 

[virtusa]

@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.

There is no optimal scenario that works for each trader. All depends on the characteristics of your trading plan. Each trader has a different trading plan, which leads to different difficulties, different risks, and different results.

So you should build the optimal scenario for yourself by analyzing the statistics from your trading plan.

I did a test on roughly 1,000 intraday trades.
These were the conclusions:

• I need to place a stop at 0.125% of the notional value. So today that means a 5 point stop in the ES. Years ago it was only 2 points ES as the index was much lower.
• If I place a smaller stop, I lose profits as profitable trades get stopped out before they really start to go. So turning a profitable trade in a losing one. Very damaging for your performance as you lose a profit and catch a loss.
  
• If I place a wider stop, I don’t make any additional profits and I lose more in each losing trade as the stop is wider. So my profits stay the same and the losses grow.
  
• I always go in full as the open loss on the entry signal, that I need to make better entries, is too small to improve my entry price. So scaling in means losing money as the average entry price gets worse. On top of that the risk increases as the average entry price is worse, so the loss gets bigger too.
• I always get out full, as I have the same problem as when getting in a trade. Scaling out will cost me money in the long term.

The past 2 years I was focusing on taking intermediate profits, and getting in again after a retracement. With the actual volatility it is a profitable strategy. At extreme levels I close my trade and reopen it after a retracement. If I miss the entry signal in the retracement, I can always still jump in at the price I got out before. So no risk of losing a futur big move. It will cost me just an extra commission in worst case.
I also reinvest the profits from the intermediate exit, so the size grows in general, which means extra profits from the retracement AND extra profits from the grown size. Took me hundreds of hours to find out how to do that in a profitable way.

 

[tyrion]

To scale out is like to trade 2 (logical) accounts at the same time - each with a different take profit level. If you do this for some time already, you can just calculate and compare how each account alone and the “ensemble” account perform.

 

[bone]

Very well stated

To scale out is like to trade 2 (logical) accounts at the same time - each with a different take profit level. If you do this for some time already, you can just calculate and compare how each account alone and the “ensemble” account perform.

 

[Buy1Sell2]

Wow, I agree with B1S2 and can't believe that others don't see the obvious truth in what he is saying.

It may feel good to scale out after making 3 pts and hold the rest for the full 6 pts but the bottom line is that one or the other is the correct place to sell everything.

Psychologically it is comforting to take some money off the table and increase your w/l rate but financially it is a sub-optimal thing to do.

I don't see how this is up for debate - all it would take is a mechanical system, run it with three different parameters sets:

First sell everything at 3 pt profit target
Second sell everything at 6 pt profit target
Third sell half at 3 and half at 6pt

There is no chance that the third scenario is going to outperform both of the other two. Either selling all at 3 or selling all at 6 is going to be superior, doing half and half (scale out) just waters down the optimum strategy with the sub-optimal strategy.

I guess if you don't know what your optimal exit point (profit target) is then scaling out could make sense but it seems like it would be worth your time to go through your trade history and figure when the optimal exit point is (would have been) and then just use that going forward.

Maybe I'm missing something but it seems pretty black and white to me.

(Edit: This is not to say that I never scale out, just that I realize what I am doing is not optimal - being human sucks like that)

Excellent analysis and posting.

 

[Buy1Sell2]

Four ES Contracts 50% win ratio versus Four ES Contracts 50% win ratio scaling out at half target.

9 pt target 3 pt initial stop loss

1st example with 20 trades
10 winners for 9 X (4 conracts) = 360 pts ($18000)
10 loser for 3 X (4 contracts) = 120 pts (-$6000)
Net profit $12000


2nd example with 20 trades
10 winners for 9 X(2 Contracts)=180 pts ($9000)
10 winners for 4.5 X(2 Contracts)=90 pts ($4500)
10 Losers for 3 X(4 Contracta) =120 pts (-$6000)
Net profit $7500

Money can be made scaling out, but it is inferior bevior.

 

[deaddog]

Four ES Contracts 50% win ratio versus Four ES Contracts 50% win ratio scaling out at half target.

9 pt target 3 pt initial stop loss

1st example with 20 trades
10 winners for 9 X (4 conracts) = 360 pts ($18000)
10 loser for 3 X (4 contracts) = 120 pts (-$6000)
Net profit $12000


2nd example with 20 trades
10 winners for 9 X(2 Contracts)=180 pts ($9000)
10 winners for 4.5 X(2 Contracts)=90 pts ($4500)
10 Losers for 3 X(4 Contracta) =120 pts (-$6000)
Net profit $7500

Money can be made scaling out, but it is inferior bevior.

Throw in a couple winners that run hard.
80/20 rule; I make 80% of my profit on 20% of my trades.

 

[tomkat22]

I cant recall seeing Kullamagi do anything other than scale out of his winning trades. It even says as much on his instructional web page. Of course he only trades stocks,not futures.

 

[BartSimpson]

I cant recall seeing Kullamagi do anything other than scale out of his winning trades. It even says as much on his instructional web page. Of course he only trades stocks,not futures.

The platform he uses to chart (TC2000) has "SIM" on it in every video he posts. He addresses this on his website and says that he uses a different platform to trade and uses the one with SIM to chart, but I have caught him "moving stops to secure profit" on the TC2000 Demo account. I asked myself why he would be moving his stop to secure profit if it's just a demo account? I wish I could still find that vid. Not about to go through 20 hours of his material looking for it again. I think he slipped up is what I'm saying.

All of these people seem to have excuses for things other people call them out on. Why do none of these people post tax returns? It's easier to say you're profitable than to prove it. Why these people troll the public I will never know. He's not selling anything so why else would he do it if not to troll?

 

[Overnight]

...He's not selling anything so why else would he do it if not to troll?

To attract views and likes to his channel. Youtube really starts to pay off as you get more and more views on your monetized content.