And these guys are telling you to scale out of winners??? If anything one should be adding at 1R and not decreasing their positions...
hey but whatever floats your boat or finds your lost remote Mike!
PEACE and good trading,
Commisso
To SCALE or Not to SCALE a profit?
- Thread starter Trend Fader
- Start date
And these guys are telling you to scale out of winners??? If anything one should be adding at 1R and not decreasing their positions...
hey but whatever floats your boat or finds your lost remote Mike!
PEACE and good trading,
Commisso
Originally posted by Lawrence Chan
To scale or not should be viewed this way -
The not scaled part, all by itself, should be profitable
as a standalone trading strategy.
The trailing part, all by itself, should be profitable
as a standalone strategy as well.
Otherwise, you would have wrong expectation what
the performance actually is for each individual part.
In short, you are trading 2 strategies that just
by coincidence that they share the same entry points
This is an excellent point. Typically a system has an optimal exit strategy. Rather than degrade it by scaling out, if the objective is to smooth the equity curve and goose up the Sharpe ratio, I would expect a better approach would be to trade a second system that uses a different entry method. Say combine a trend following system with an S and R system. Many CTA's do exactly that.
I tend to agree with Commisso on this, but I am thinking more in terms of a short-term trading system. I know many hedge funds do scale out of longs into strength and vice versa, but we are talking big positions that cannot just be dumped. They also could be executing a form of delta neutral trading( that's the "hedge" part). If your longs begin to overbalance your shorts, you either take some profits or add shorts.
All the top traders I speak to scale into strength. I have never met one big time trader that told me he just has a fixed loss or fixed profit target.
Other traders and myself take profits when there on the table and protect the remainder of profits via trailing. I dont know why you are so against this idea. There always is going to be an optimal place to take the full profit in any system.. but in real life it doesnt work.
--MIKE
I don't understand this.
In the meantime, i still trade 1 contract but will to trade 2 in a few weeks.
I expect to scale out my 1st contract at 1R as usual but in other cases too :
- If the trade goes nowhere (nor good, nor bad) but I want to give it a chance, I scale out my 1st contract (scratch) to reduce my exposure and let the 2nd run.
- If the trade smells bad I don't wait for my stop being hit on both, I scale out one contract before the full loss.
That way, i don't always take my full losses wich is the dark side of scaling out.
Is this what you think about when you talked about scaling out of a loser ?
First off, I never said that I do not trail gains and I never said that I do not buy or sell into strength. What I said was that I do not cut my winners short by scaling out as soon as the market moves in my favor by 1R. Actually at 1R I am looking to add!
Secondly, perhaps maybe I live in a "fake" world, but having the will to hold on tightly and exit a position at the optimal area on the macro level -- certainly does work.
If it is statistically better on the macro-frame to scale out, then by all means a trader should be doing so.
If it is not statistically in a traders favor to scale out and his only motives for doing so is to cater to his psychological shortcomings -- well then he is a fool and is weak. It is comparable to covering the earth with leather so that you can avoid stepping on stones and sharp obects -- when it would be in the traders best interest to just wear a pair of fucking shoes!
Isn't it obvious that by scaling in/out you remove the dependency on temporary weird fluctuations? In my strategy, I ALWAYs build up the position in small increments over a predetermined time frame and then close the position in a similar manner. Seems to work perfectly. Several of you suggested that one should not scale out of losers. Hmmm. Weird. By scaling out of my positions (regardless of the winner/loser status), I AGAIN remove the dependency on fleeting deviations and achieve the average price I'm targeting.
Example, I close out my position after the open. Let's assume it looks like I'd take a loss of 3% if I just swallow it in one trade. What you are suggesting (by saying I should not scale out), is that it is MORE likely to go down than up. Why would it????
It actually seems more likely that if you do, you'll just be a victim of your panic and then will see it come back in a few minutes. By gradually scaling out, I can smooth out this process and often see what seem to be losers turning into winners. Yes, to foresee you question, that also happens on the upside (less freqently, though, for the reason mentioned next). But the point is, as long as I can correctly predict that on average the price will be where it will be, I will make $.
The very first post of this thread made PERFECT sense. By averaging out the prices this way, one substantially reduces the volatility. In theory (and assuming unlimited resources), it should not make any difference except for the oft-mentioned phychological benefits. In PRACTICE, however, that insures you don't get killed by a few sequential big losses.
It seems like a trivial excericise to simulate a random process with a shifting drift (and assume, you, as a trader, correctly forecast the directiion of this drift, to make you profitable in the simulation). In the two alternative bootstrap scenarios (i.e. you either don't scale in/out or do) it seems obvious that given a starting dollar amount the nonscaling trader will get wiped out before he can notice it.
You guys amaze me sometimes.
Let's say you have a strategy with an expected return of 1%. By scaling in/out you make the distribution more pointed and less leptokurtic - hence, even though it's less likely you'll see high per trade profits (sux ha?), it is ALSO less likely you'll one of the very negative outcomes that will wipe you out. What else is there to discuss. The first post answered the question it posed.
Example, I close out my position after the open. Let's assume it looks like I'd take a loss of 3% if I just swallow it in one trade. What you are suggesting (by saying I should not scale out), is that it is MORE likely to go down than up. Why would it????
It actually seems more likely that if you do, you'll just be a victim of your panic and then will see it come back in a few minutes. By gradually scaling out, I can smooth out this process and often see what seem to be losers turning into winners. Yes, to foresee you question, that also happens on the upside (less freqently, though, for the reason mentioned next). But the point is, as long as I can correctly predict that on average the price will be where it will be, I will make $.
The very first post of this thread made PERFECT sense. By averaging out the prices this way, one substantially reduces the volatility. In theory (and assuming unlimited resources), it should not make any difference except for the oft-mentioned phychological benefits. In PRACTICE, however, that insures you don't get killed by a few sequential big losses.
It seems like a trivial excericise to simulate a random process with a shifting drift (and assume, you, as a trader, correctly forecast the directiion of this drift, to make you profitable in the simulation). In the two alternative bootstrap scenarios (i.e. you either don't scale in/out or do) it seems obvious that given a starting dollar amount the nonscaling trader will get wiped out before he can notice it.
You guys amaze me sometimes.
Let's say you have a strategy with an expected return of 1%. By scaling in/out you make the distribution more pointed and less leptokurtic - hence, even though it's less likely you'll see high per trade profits (sux ha?), it is ALSO less likely you'll one of the very negative outcomes that will wipe you out. What else is there to discuss. The first post answered the question it posed.
Did you read what you just wrote???? "Before I take a full loss???" How the heck do you know it will be a loss in the end? By taking it all now, you will have a loss, I agree. But by scaling out, it may turn out to be a gain just as well. If you take your losses quickly, before ever giving them a chance to reverse, you make the distribution of your outcome asymmetric, and not in your favor.
vladiator,
You make some good points.. but I think you are wrong to question the validity of whether this is a constructive thread or not.
I think its an important topic which relates to trading big time. I think this thread has more value than a lot of other BS threads on this board. It amazes when a trader wants to start an intellectual discussion about a topic that is relevant to all traders, and gets flack for starting the thread...
At times it seems the threads that get the most attention are the ones that are really worthless....
--MIKE
You make some good points.. but I think you are wrong to question the validity of whether this is a constructive thread or not.
I think its an important topic which relates to trading big time. I think this thread has more value than a lot of other BS threads on this board. It amazes when a trader wants to start an intellectual discussion about a topic that is relevant to all traders, and gets flack for starting the thread...
At times it seems the threads that get the most attention are the ones that are really worthless....
--MIKE