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Very true, this is kind of a meaningless discussion without context. If you are playing a trend and entering on a pullback it makes little sense to not scale in because you don't know if the trend has stopped. You can keep the loss smaller but still have room to grab the "meat" of the trade. Faster more choppy trades/fades I think it becomes less sensible although I tend to leave runners on purely for psychological reasons on most trades.
Can you help answer these questions from other members on NexusFi?
Are you for real?
Do you treat trading like gambling?
Do you know what technical analysis is?
Do you trade any setup without having positive expectancy from backtesting?
Scaling out is perhaps the most mathematically unsound way to manage a trade, in my very humble opinion. When the trade goes against the trader, the trader holds and takes a loss on all contracts. When it goes in his favor, he gets out of the trade.
After taking an original initial risk and entering a trade, scaling in makes a lot more sense mathematically, and, given a confidence that the trade will continue favorably, makes more sense than NOT adding to the position. If you had not taken the original trade, would you seek to enter here? If so, add. If not, don't add. It's that simple. Scaling in with a smaller initial risk does NOT make much sense mathematically as it's the same problem as scaling out, only in reverse (you take a larger position at a more unfavorable price than if you simply entered with a comfortable initial risk).
As an example, given the size of your stop, you have calculated that your risk tolerance allows you to trade 3 contracts on this trade. It would not make sense to start with 1, then add another, then another, for you have increased your average price and simply limited your risk, which is the problem with scaling out, only scaling out is worse because your initial risk is even higher.
All in, all out is the most sensible way, but this presumes that you will know based on back testing how much of a move you can expect. How much risk can you handle? If it's 3%, then put it on. But it would not make sense to NOT add if market conditions say you will benefit by doing so. So AIAO presumes that you WILL know, which you can never know.
I suppose the ideal situation would be to close the entire position when a reversal is anticipated, and then wait for a more favorable position and then enter the full position again. But this is picking tops and bottoms, which is bound to end with trouble in the long run.
"When I'm bearish and I sell a stock, each sale must be at a lower level than the previous sale. When
I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stocks on a scale
down, I buy on a scale up." Jesse Livermore
These are just opinions and IMHO, it doesn’t make sense to throw out a blanket statement like” it is mathematically unsound to scale out” when you are not considering all the different types of trading.
I used to trade equity OPGs and would sometimes get a bunch of fills at the open (well, 7 or 8 is a bunch for me), dumping the ones that were moving against me but taking off half of the share size of the ones in my favor in the first few minutes, leaving on the rest to see how each one was behaving in relation to the market as a whole, etc. Anyway, that is a strategy where it makes no sense not to scale out. Another example that necessitates scaling in and out is if you are throwing around size in a relatively illiquid market (be it 3000 shares in a stock that trades 200k per day or 40k shares in a stock that trades 3 million…talk about slippage and orders sprinting away from your megablock
Beyond that, it depends upon your trading style like how tight your stops are in relation to your targets and what % of your entries get stopped out right away and what % go into a good profit before coming back to BE or stop you out(the latter would be better to scale out, the former probably not).
For my psychology, scaling out works because I have an OK knack for entries, I do not have a knack for knowing exactly where the price will turn (if I did, I would be retired), my winning % is higher than it would be otherwise (net profit, truthfully, about the same) and my trading style is conditioned to stay active. Besides, one issue with all in-all out is the probability that you may miss those rare 4 Sigma day moves, thinking it is too low to drop more, etc. For me, if i am already sitting on a good profit, I am more inclined to see what is happening with clear n' objective equanimity, "market is dropping off a cliff, let us hold a small amount until we see yet another final capitulation" (as those days have several, each one bigger than the last, or so it seems).
As many have said on here, it all depends upon what works for your distinct personality but scaling in and out can work for some strategies
Myshkin, my posts are solely my opinion as well, as the first sentence of my prior post said, so these are definitely just my thoughts, and in no way intended to be anything other than that.
If scaling out for someone's trading actually shows a higher profit than an AIAO, then one way to increase the profit would be to take the profits sooner (to be determined by the data) by exiting the entire position. In other words, the targets of the trades are too high, as they are so rarely reached that it makes little sense to hold the bulk of the position waiting for that target. At any rate, this is something about which people will always disagree. I think you had it right when you said that perhaps more important than the mathematics, which almost always go against scaling out, is the psychology of the trader. Who doesn't like to bank profits and reduce risk? Regardless of the logic behind scaling out, if the trader trades well with it, then he should do it, period.
As for the portion of your post I quoted above, I do not like profit targets and almost always let the market take out my trailing stop. If I see what looks like exhaustion, I will manually close the trade, and am working on being able to re-enter with confidence.
Hey josh, it's hard to get the attitude of someone from written posts and yes, I definitely appreciated that your opinion was just that with your extended spelled out version of IMVHO (i'm too lazy
Definitely, IF one can dump their entire position when PA dictates and get back in full size when PA says it is time to get back in, either with price improvement or when the traded instrument has cleared the confluence zone, then that is the way to go, for sure. I'm still going with the notion that the profitability of scaling out totally depends upon how good a trader is at entries and exits and % of being stopped out which is largely to do with, as you said, reasonable profit targets and of course, high probability entries. If you are profitable on half your trades with the ability to hold onto a portion of your position for those rare (bit not too) 10 X profits, then it will usually work out mathematically better than an AIAO strat with too small a target. You know, it all depends on the instrument and right now, say CL, a 25 tick stop is reasonable (barely) and you know it can move 250 ticks in less than an hour, so... As you know, just different takes and to me, both valid.
I must disagree with all of you. All I'm saying is to treat the scaling as two different strategies. If you do this then you'll be able to collect results of each strategy and decide. As I wrote earlier you will have 3 possible outcomes and in one of them you will benefit from scaling. I don't believe that you actually will, but its a remote possibility. In any way then we are talking about two strategies and because they are unknown strategies, then not me and not anyone can tell if both are good or just one or none of them.
If you treat scaling as one strategy then you intentionally want to trade blind folded, and its entirely up to you.
Because, not having complete certainty on the outcome, you adhere to a fixed fractal percentage. Shorting a correction when you have contracts going the other way can hedge against some the losses and potentially give indications of when to re-enter an additional fixed fractal percentage towards the greater trend.
Depends on the strength of the trend, the ability to get good fills/exits and the degree to which you are moving the market (not much in most people's case). Human error unavoidable but not necessarily to the extent that it becomes a losing strategy in the long run.
Getting all your eggs in at the right time will always be better but comes with such a risk.
You still don't get it. I'll try to explain for the last time.
If you treat a scaling strategy as one strategy, you will have two outcomes in the long run:
1. Its a winning strategy -> trade it
2. Its a losing strategy -> ???
If you split it in two strategies, you will have 4 outcomes:
1. Each strategy is a winning strategy and some periods strat1 is better and others strat2 is better -> trade both. Equivalent to the first outcome of combined strategy.
2. Both strategies are losing -> Equivalent to the second outcome of combined strategy.
3. One is winning and one is losing -> maybe, just maybe you will conceder dumping the losing.
4. Both are winning, but one is much better then the other -> do whatever you want. I would dump the inferior strategy.
If you can contradict this analysis, I'll be very pleased, otherwise I don't want to argue. I don't care if you have a friend who trades it profitable, or in other explanations (fractals??).
I have a friend who won 1 million in a lottery, and my father is Benoit Mandelbrot. So?
