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All in all out vs. scaling in and out
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View Poll Results: All in all out or scale in and out?
All in, all out 79 33.05%
All in, scale out 103 43.10%
Scale in, scale out 57 23.85%
Voters: 239. You may not vote on this poll

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All in all out vs. scaling in and out

  #11 (permalink)
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I actually do both...

Scenario 1

Work Bids at Bid - 2 ticks, Bid -3 ticks, Bid - 4 ticks
Work Asks at Ask + 2 ticks, Ask + 3 ticks, Ask + 4 ticks

Scenario 2

Work your first Bid at Bid -2 ticks, once you get filled and move say 3 ticks in profit, work another Bid at Bid - 1 tick, if you move 4 ticks in profit, work another Bid - 1 tick

in both scenarios you have to have an active order cancellation strategy.... both systems work if you maintain a very strict order management system (cancel orders, fixed stops, targets, etc)

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  #12 (permalink)
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Hey guys...just a noob trader, but I read this the other day and thought you might be interested. It was written by a trader that was a Turtle. Seems, they (Turtles) were pretty successful.

Anyways, quote: "Turtles entered single unit long positions at the breakouts and added to those positions at 1/2 N intervals following their initial entry."

So, it appears "scaling in" was the way they liked to do it.

They also had a method they called the "Whipsaw", that appears was a "scale in_scale out" type of strategy.

Anyway, I'm not saying this is the only way to go, just something to ponder. Here's a link to the Turtle rules if you want to read it. Download link is at the bottom of the 1st article. Turtle Rules Pdf

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  #13 (permalink)
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I scale in and out. I believe an all-in/all-out approach implies that you have identified an "absolute" in the market, which is impossible. Scaling in whether it be dollar cost averaging or whether it be adding to a winning position implies you don't know what will happen next, but that you are happy taking a position because you believe the odds are with you (positive expectancy) with the position. However, you are open to scaling in because you cannot predict what the market will do next (absolute top or bottom).

Scaling out is the same. I target price levels that I think are probable. I have no way of knowing what will happen, but I prefer to be in a position to capitalize on price action instead of out of a trade/flat because I've already scaled out.

Yes, the argument could be made to all-out at a certain price, and then be ready to jump back in almost immediately. I do something similar which I've discussed at length in the price action thread, but it is not the same. I've discussed in my advice thread, as well, that by having three targets I often can reach my daily goal with just one trade. Psychologically, this is huge and I believe it sets me up for the best outcome each day. I wouldn't be able to do that with an all-in/all-out approach without increasing my risk (contracts).

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  #14 (permalink)
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Scaling In and Money Management

If you have a backtested setup, which gives you an edge, scaling in or scaling out does not make sense. You just need to follow the rules that you have backtested.

Let us assume that you have backtested a breakout strategy, taking a position 3 ticks above or below the breakout point. If you take half a position only, and add the other half after a 5 tick move in your favor, this is a new setup which is entering a position 8 ticks above or below the breakout point. The edge of the new setup will either be better or worse than the edge of the first setup, so you would do best by selecting the setup with the higher edge and ignoring the other one.

This means scaling in involves two different setups, one of them being inferior. The first setup probably has a lower % profitable, but a higher ratio of average winner to average loser.

Why did the Turtles scale in then? I do not think that the reasons were psychological. Richard Dennis' system was difficult to trade anyhow, as most of the Turtles could not follow the simple rules. Pyramiding does not simplify, but complicate. Your trade has just moved out of the danger zone, and you add danger again.

So it had to do with money management. If you look at the turtle rules, a long position was entered 1 tick above the breakout point BP. The initial risk would be R. The next contract was added at BP + 1/4 R, the stop loss adjusted to BP -3/4 R, then a 3rd and 4th contract were added in a similar way. The total associated risk at the entry points was

1 contract : R
2 contracts : 0.75 R + R = 1.75 R
3 contracts : 0.5 R + 0.75 R + R = 2.25 R
4 contracts: 0.25 R + 0.5 R + 0.75 R + R = 2.5 R

This shows that the risk per contract was considerably lower ( by a factor 4/2.5 = 1.6 ) after the forth position had been put on. The upside, however was also reduced. Therefore it does not automatically result in a better overall return-to-risk ratio. It depends on the trading approach.

As a result, scaling in enabled the Turtles to trade larger position size with the same predefined risk. As shown they could increase their position size by a factor 1.6 with the same risk management rules. The downside is a smaller profit on the added contracts. In trend trading the upside outweighs the downside.

The Turtle approach was entirely built on mathematical grounds, discretionary day trading also needs to take into account psychological pressure, which leads to entirely different conclusions.

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  #15 (permalink)
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Fat Tails View Post
This means scaling in involves two different setups, one of them being inferior. The first setup probably has a lower % profitable, but a higher ratio of average winner to average loser.

I know what you are trying to say, or it could just be I am too dumb to understand what you wrote. But, I disagree with the above statement.

Let's say I put on 3 lots for a setup signal. Price begins to move against me. Let's say price has moved against me 3/4 of the way to my stop, and then price itself stops and turns back around and starts heading the "right" direction. I am a believer that you cannot pick the perfect entry price. If after analyzing the trade I still firmly believe in it, then it makes sense for me to scale in at a lower risk (same stop) and higher reward (same targets). I still believe in the setup as much as I did initially, but now I have the opportunity to reduce risk.

Keep in mind, I don't advocate adding to losing positions even though it seems blatantly clear that is what I am doing above. I struggled with this for a while before finally coming to the conclusion that adding to a losing position is quite different than what I am doing. Adding to a losing position usually involves someone with no stop, or a stop that has been moved, and moved, and moved. You are "hoping" now for the market to do something, you "just want out breakeven" etc. To me, that is adding to a losing position.

Whereas with what I do, it usually happens in a matter of seconds to minutes, and my stop is never moved. If I believe that I was in error on the original trade then I naturally will not add to it, but instead will look to get out. It is these "moments" or these "responses" that define traders, and is why I think a automated system is inferior once you have proper experience and don't make stupid trading mistakes.

So back to my example. I entered a position because my signal research and experience says it is a good place to do so. I don't believe the odds are any better for it to "blast off" than for it to retrace a handful of ticks, and then go my way. In other words, I don't believe you can predict with future certainty if you should have "waited" for a pullback before entering or if you had done so you would have missed the setup altogether. With this belief in mind, I think it is good to be in a position to scale in when it makes sense to do so. I gave the scenario above.

Now, there is also scaling in on winning positions. I do it on occasion but usually CL moves so quick, and I am a scalper, that there would be too much going on if I was trying to enter new positions at virtually same places I am exiting some positions.

However, if I were swing trading, then scaling in is much easier to manage. Again, I am holding now over a multi-day period, I cannot predict what price is going to do. I start with 1/3rd my planned position size to test the waters. If price reacts positively after several hours, or 1/2 a day, whatever, then I scale in at a good place and add another 1/3rd. Same thing tomorrow, etc. To put on the entire position size all at once seems arrogant to me in such an example, it seems to claim that you know what the future holds. The more time that is involved (swing trading = much more time than scalping) I think the more uncertain you can know what price will do.

I welcome the discussion

Mike

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  #16 (permalink)
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Hi Mike,
appreciate your answer, but partly disagree with the statement.
Let me answer piece by piece. Added some icons, because it is such a dry subject..


Big Mike View Post
Let's say I put on 3 lots for a setup signal. Price begins to move against me. Let's say price has moved against me 3/4 of the way to my stop, and then price itself stops and turns back around and starts heading the "right" direction. I am a believer that you cannot pick the perfect entry price. If after analyzing the trade I still firmly believe in it, then it makes sense for me to scale in at a lower risk (same stop) and higher reward (same targets). I still believe in the setup as much as I did initially, but now I have the opportunity to reduce risk.

You are talking here about a SECOND ENTRY at the same price, which occurs some time after the first entry. These are two independant setups and both can be traded independently. For example if you believe that "it makes sense for me to scale in at a lower risk (same stop) and higher reward ", you then only should take the second entries and always ignore the first. By the way this is what Al Brooks suggests. I simply would backtest the second entry versus the first entry and decide which of the two is the better setup.

There might be a limitation in the number of second entries, as there will be fewer than first entries. In case you trade several markets you should find as many second entries as first entries, and you will focus on second entries only. If you are a slow discretionary trader monitoring one market only, there may be a cost for lost opportunity related to first entries not taken. Let us assume that over a day there will be 10 first entries and 5 second entries and that you trade 2 contracts maximum. You can then either

- either enter 10 trades (1st entry, 1 contract) and 5 trades (2nd entry, 1 contract)
- or enter 5 trades (2nd entry, 2 contracts)

The first option leads to 15 roundturns, the second one to 10 roundturns. The optimum choice really depends on the backtest. This shows that trading results depend on all, trade expectancy, position sizing and trade frequency.


Big Mike View Post
Keep in mind, I don't advocate adding to losing positions even though it seems blatantly clear that is what I am doing above. I struggled with this for a while before finally coming to the conclusion that adding to a losing position is quite different than what I am doing. Adding to a losing position usually involves someone with no stop, or a stop that has been moved, and moved, and moved. You are "hoping" now for the market to do something, you "just want out breakeven" etc. To me, that is adding to a losing position.

Absolutely agree. Never add to a losing position.

Big Mike View Post
Whereas with what I do, it usually happens in a matter of seconds to minutes, and my stop is never moved. If I believe that I was in error on the original trade then I naturally will not add to it, but instead will look to get out. It is these "moments" or these "responses" that define traders, and is why I think a automated system is inferior once you have proper experience and don't make stupid trading mistakes.

So back to my example. I entered a position because my signal research and experience says it is a good place to do so. I don't believe the odds are any better for it to "blast off" than for it to retrace a handful of ticks, and then go my way. In other words, I don't believe you can predict with future certainty if you should have "waited" for a pullback before entering or if you had done so you would have missed the setup altogether. With this belief in mind, I think it is good to be in a position to scale in when it makes sense to do so. I gave the scenario above.

If you are talking about beliefs and experience, this cannot even be discussed. It seems that the beliefs and experience are influenced by already having put on part of the position. Otherwise you would not need that first half to enter the high probability trade for the second half. And I think that this is exactly the key. As humans we are prone to error. Putting on half of the position allows us to reevaluate the trade and the scenario. on which it was based. Then if price confirms the initial, discretionary expectation, you can enter the second half with more confidence. This is not mathematical, but behavioural! You would not code that into an automated system.


Big Mike View Post
However, if I were swing trading, then scaling in is much easier to manage. Again, I am holding now over a multi-day period, I cannot predict what price is going to do. I start with 1/3rd my planned position size to test the waters. If price reacts positively after several hours, or 1/2 a day, whatever, then I scale in at a good place and add another 1/3rd. Same thing tomorrow, etc. To put on the entire position size all at once seems arrogant to me in such an example, it seems to claim that you know what the future holds. The more time that is involved (swing trading = much more time than scalping) I think the more uncertain you can know what price will do.

This is something entirely different than your first example. The first example was a second entry. Adding to a position when the market has moved in your favour is PYRAMIDING. I maintain that the main argument for pyramiding is the modified return-to-risk profile. You can put on a first contract with low risk, once it has left the danger zone you can add to your position without increasing the risk. This is particularly interesting, if you keep your positions for a longer time. Pyramiding is a concept linked to trend trading and the use of a trailing stop. You load your position, allowing for higher profits, without increasing bottom line risk.

However, if the setup has a defined target based on volatility or the chart pattern, pyramiding is not always possible. Your second entry will get you into the position late, and although it might be a higher probability trade, the profit per trade can be ways inferior. I do not think that it is arrogant to put all in at once, if you follow your plan and have your stops in place.

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  #17 (permalink)
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Could it be that scaling out allows people to manage the trade better from a psychological perspective?

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Absolutely. There is a known human deficiency called loss aversion. Has to do something with anchoring. On the profitable side of the trade there is the irresistable pull to lock in profits.

If you scale out at a near profit target, say you take profits on your long position 10 ticks above the entry level for half of your position and you adjust the stop loss of the second half of your position to 9 ticks below the entry, you have left the danger zone.

You are now playing with the money of the house, can get yourself a cup of coffee. The worst that can happen now (technical problems or volatile market conditions excluded) is a break-even. So what.

The irresistible pull to take your profits is now cured, and you can stay in for a larger gain. It is hard to cut losses short and let the profits run, because it is counterintuitive.



diverdan View Post
Could it be that scaling out allows people to manage the trade better from a psychological perspective?


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diverdan View Post
Could it be that scaling out allows people to manage the trade better from a psychological perspective?

Although most won't admit it, the answer is yes. Why else would a trader knowingly reduce his profit potential?

Scaling out is an insurance policy against risk, and like all insurance, there is a cost to have it. And any increase in cost reduces profit.

Finance 101.

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  #20 (permalink)
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So far in my limited experience I prefer all in all out.

The issue for me is on the losing side. If you are scaling out of winning trades, you are lessening your percentage of large wins, but heightening your overall win percentage. On the losing side however with trades that turn bad right from the start, every trade will be a full loss.

Lets say it runs directly to your stop and hits it at Y. That is X number of contracts stopped out there. A full loss.
If you are moving your stop up to breakeven and scaling out at different levels, a vast number of your winning trades will be hitting target 1 or 2 and then get stopped out. This is due to your stop now being much closer to the price level, and therefore having a much higher probability of being hit. Your risk reward ratio is not great, unless you are running very tight stops, and then your probability of a win goes down.

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