To SCALE or Not to SCALE a profit?

[Trend Fader]

Interesting idea...

I was wondering whether if one scales out of positions for profits they in effect smooth out their equity curve.

If one risks 1R for a trade.. and begins to scale out at 1R profit and then trails the rest of the profits.... in my opinion they are smoothing out their equity curve.

By scaling out at a multiple of your risk and locking in partial profits you form a trade distribution of: moderate frequency losses, huge frequency scratch/tiny profit trades, and few frequency big winners.

This is opposed to taking full loss and full gain.. which would have huge frequency of losers, huge frequency of big winners, and small frequency of scratch/tiny profit trades.

By avoiding a huge frequency of losers one minimizes likelihood of sharp drawdown and maximizes trader's psychological profit benefits.

Would be interesting to see how the equity would slope in either two scenarios (scaling or non scaling) after massive amount of testing, regardless of it going up or down. The key is to have the equity curve slope in a smooth trend... Having the slope up or down, and to what degree.. relies on the traders entry and setup.

In my opinion the smoothness of the equity curve is more important than the degree of slope because in reality, trader psychology is what really does the most damage.

--MIKE

 

[Quah]

Originally posted by Trend Fader
Interesting idea...


This is opposed to taking full loss and full gain.. which would have huge frequency of losers, huge frequency of big winners, and small frequency of scratch/tiny profit trades.


--MIKE

I've never understood this method myself. As you said, "this" is opposed to taking full loss and full gain - but what is "this"? Seems to me "this" is taking full loss and partial gain. Either way, you are taking full loss. The only way this would make any sense is if doing it increased your winners substantially.

 

[Trend Fader]

Originally posted by Quah


I've never understood this method myself. As you said, "this" is opposed to taking full loss and full gain - but what is "this"? Seems to me "this" is taking full loss and partial gain. Either way, you are taking full loss. The only way this would make any sense is if doing it increased your winners substantially.

I agree 100% of what you are saying. This is the biggest problem with scaling out.. taking only a partial profit, at the expense of taking the full loss. There is no partial loss.

But here is the point. What's really important is not the dollar amount profit in trading, but the manner in which the profits are realized. Meaning, by scaling you minimize frequency of losses by taking partial profits.

I noticed people always want to optimize the net $ amount of profits, yet fail to optimize the slope of their equity curve.

Quah, assuming it didn't increase your winners substantially, only slightly.. and you even ended up leaving large amounts of $ on the table yet still remained profitable.. the tremendous gain is the ability of smoothing out your income.


--MIKE

 

[Quah]

Originally posted by Trend Fader


I agree 100% of what you are saying. This is the biggest problem with scaling out.. taking only a partial profit, at the expense of taking the full loss. There is no partial loss.

But here is the point. What's really important is not the dollar amount profit in trading, but the manner in which the profits are realized. Meaning, by scaling you minimize frequency of losses by taking partial profits.

I noticed people always want to optimize the net $ amount of profits, yet fail to optimize the slope of their equity curve.

Quah, assuming it didn't increase your winners substantially, only slight.. and you even ended up leaving large amounts of $ on the table.. the tremendous gain is the ability of smoothing out your income.


--MIKE

I completely agree with the benefit from the psychological side - as long as you don't end up net loser by doing it, of course. As you've probably seen from my journal thread, I'm hardly against "cutting profits"....

 

[Trend Fader]

So I guess here is the real question:

What's more important in really making it as a professional trader?

Net dollar amount at an optimal profit at the expense of huge drawdown? Or optimal smoothness in equity curve and minimizing drawdown?

I think for your avg trader.. the smoothness is much more important, thus scaling is the way to go.

I remember reading in Van Tharp's book how he said he does not believe in scaling out of profits because his students/patients agreed that if they would just take full loss/ full gain they would of netted more dollar amount in profits. He failed to take into consideration what this would do to your equity curve. Big mistake from a psychology guru! Maybe he knows something that we don't? .. lol


--MIKE

 

[daniel_m]

Originally posted by Trend Fader
So I guess here is the real question:

What's more important in really making it as a professional trader?

Net dollar amount at an optimal profit at the expense of huge drawdown? Or optimal smoothness in equity curve and minimizing drawdown?

I think for your avg trader.. the smoothness is much more important, thus scaling is the way to go.

i disagree. at the end of the day what truly is the most important is the dollar amount of profit or loss, not the smoothness of the way you got there. i mean, that's how you determine whether you've traded well or not isn't it? by the amount of money made or lost.

making money and doing it smoothly is undoubtedly pyschologically easier, but that pyschological easiness doesn't necessarily translate into making money in the long term.

also, i'm not sure i'm understanding you correctly. you say scale out of winners, but take losses with full size, right? and this is supposed to somehow make your equity curve smoother? how? scaling out will let you have a few more winners than you might have otherwise had (you know, stock goes to point X, you scale out, stock comes back below point X, stops you out on the remainder of your shares, but you book it as a winner), but the equity curve will depend on the DOLLAR amounts, not the number of winners.

therefore i think that your premise that a higher net dollar amount (by virtue of not scaling out) coming at the expense of greater drawdowns (presumably because partial wins weren't taken) is incorrect.

 

[Swish]

Trend Fader,

I agree in principle with your belief that it is more important to smooth your equity curve than to shoot for big wins - especially as a new trader - because "big" losses have more of a damaging psychological impact than "big" wins do for most people.

It seems to me a way to manage the issue a bit better is to move your stop losses to your entry point when you get to the 1R positive gain point. Thus, you end up fewer big losses, more scratch trades, and more big wins than you would with your scaling approach. I trade intraday and personally don't trade anything that does not have close to or in excess of a 2:1 Gain/Loss ratio.

You could exit a portion (up to half) of your position at the 2:1 target price, then set a relatively tight trailing stop for the remainder of the position. Assuming you were choosing your entries well, this would be a scaling approach that would result in a better balance of targeting greater size wins.

 

[Miki]

I guess it’s all matter of trading style.

I prefer to reach my target - and then look for any exit signals – if there are none I let the trade continue until I see the first exit signal.

 

[Trend Fader]

Originally posted by daniel_m


i disagree. at the end of the day what truly is the most important is the dollar amount of profit or loss, not the smoothness of the way you got there. i mean, that's how you determine whether you've traded well or not isn't it? by the amount of money made or lost.

making money and doing it smoothly is undoubtedly pyschologically easier, but that pyschological easiness doesn't necessarily translate into making money in the long term.

also, i'm not sure i'm understanding you correctly. you say scale out of winners, but take losses with full size, right? and this is supposed to somehow make your equity curve smoother? how? scaling out will let you have a few more winners than you might have otherwise had (you know, stock goes to point X, you scale out, stock comes back below point X, stops you out on the remainder of your shares, but you book it as a winner), but the equity curve will depend on the DOLLAR amounts, not the number of winners.

therefore i think that your premise that a higher net dollar amount (by virtue of not scaling out) coming at the expense of greater drawdowns (presumably because partial wins weren't taken) is incorrect.

Well said, but here is where I disagree. I dont measure how well I do at the end of day. One day is insignificant to measure performace. I look at weekly and preferably monthly performace.

I dont understand what you were refering to as to why scaling out does not smooth out your equity curve. You said it yourself.. scaling out will provide you with a few more winners. If you do anything that increases your % of winning trades it smooths out an equity curve. With full loss or full gain.. you have no middle ground.. no scratch trades. Lets assume you have 1R as loss.. then you have % of R as scratch and the big winners are *R (multiples of R). If you scale you add a third dimention which in effect smooths out your equity curve.

Psychologically its much easier to trade with a higher % of winners than losers.. assuming that the losses are all contained and minimal relative your losses.

SWISH,

In essense by putting a stop at breakeven once X profit was reached is a form of scaling.


--MIKE

 

[birddog]

I always scale in and always scale out. If I get in and the trade goes in my favor I might add to it incrementaly 4 times.

But if it goes against me then I get out.

This works better on shorts than on longs.