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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 85 32.08%
All in, scale out 113 42.64%
Scale in, scale out 67 25.28%
Voters: 265. You may not vote on this poll

 
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All in all out vs. scaling in and out

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  #1 (permalink)
 caprica 
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I am curious to know how you trade. Do you trade all in all out or do you scale in and scale out? Obviously this only applies if you trade more than one contract.

"Let us be thankful for the fools. But for them the rest of us could not succeed." - Mark Twain

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  #2 (permalink)
BigDog
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risk-reward is significantly better when you scale in and out of orders

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  #3 (permalink)
 Saroj 
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hmm... not according to my stats

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  #4 (permalink)
 caprica 
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Interesting. Gives me an idea for another poll which I will be creating soon.

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  #5 (permalink)
BigDog
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Saroj View Post
hmm... not according to my stats


maybe you are not managing your positions appropriately then...

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  #6 (permalink)
 sefstrat 
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I am with BigDog on this one, scaling-in and out is critical for controlling risk.

All-in, scale-out can work well also if the strategy is designed around that.

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  #7 (permalink)
 shodson 
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I'm an all-in, scale-out guy. I was just wondering, when you are scaling in, are you scaling in at different price levels of the same move, or scaling in at the same price. So for example, if ES if 958.00 looking for a 4-tick scalp, and you buy 2 contracts, and it goes up to 958.50, do you then buy more, hoping for another 4-tick scalp, or do you wait to see if it comes back to 958.00 to buy more? I guess it depends a lot on your setup and what you hoping to get out of the trade and how you manage your risk. I'm just wondering about real-world scaling-in examples. It seems I feel lucky if I can even find a trade that runs far enough for me to scale into and still make money.

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  #8 (permalink)
BigDog
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i'm constantly working orders on both sides 3 or 4 per side at various levels...


essentially working average prices

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  #9 (permalink)
 sefstrat 
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BigDog View Post
i'm constantly working orders on both sides 3 or 4 per side at various levels...


essentially working average prices

So like market making essentially?

What kind of stops/targets do you use in that kind of scenario?

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  #10 (permalink)
 max-td 
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BigDog,
does this mean once your are in a trade, you add to your position what is possible,
average up or down - depending what the market gives you ?

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  #11 (permalink)
BigDog
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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)
Jugador
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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)
 Big Mike 
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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).

Mike

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  #14 (permalink)
 Fat Tails 
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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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 Big Mike 
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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)
 Fat Tails 
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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)
 diverdan 
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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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 Fat Tails 
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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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 Zoethecus 
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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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 Twiddle 
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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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  #21 (permalink)
 Jeff Castille 
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Zoethecus View Post
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.

The best trader I know told me......."controling risk is the name of the game"

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  #22 (permalink)
 Jeff Castille 
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Scale Out of Winning Trades with Partial Exits | TheStockBandit.net

Here is a good article about the advantages of scaling out...........

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  #23 (permalink)
 PandaWarrior 
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Scaling out has one distinct disadvantage, it exposes your entire position to the entire stop but reduces your exposure to the entire move.

Beyond that though, scaling out is a huge confidence booster, there's nothing like being in a free trade!

At some point, I believe scaling in is the ultimate answer. Lets say you trade 10 cars normally. A typical scale out maybe to take 3 cars off at 5 ticks, another 4 off at 10 and let 3 ride for as long as you can. This has the built in disadvantage of having your entire position exposed to the stop.

If you enter instead with 3 cars, add 4 more at 5 ticks, and another 3 at ten ticks and let all of them ride, in theory anyway, you are exposing only a small portion of your total position at the early stages of the trade when it is most likely to go against you and you are adding positions as the trade gets going in your favor. I read this somewhere and it seems to make a ton of sense. For me, if I took a small position at the beginning of a move, added to it on a retrace, and again on future retraces until my entire 10 cars was in play. Then all out at a predetermined target or when price action says the move is over. This seems to me the best way of all.

Of course, I have never done this nor do I really know how to it but at some point in the future, I'd like to try.

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 Fat Tails 
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Zoethecus View Post
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.

It is correct that you reduce your exposure when scaling out, but you could even further reduce your exposure, if you take the profits on the entire position, and never trade again. This is of course an oversimplified reasoning. But digging deeper I can imagine three reasons, why to scale out. And only the first one would be risk-related.

1. System Trading: Improving the Sharp Ratio

If you have made your homework, you know the expectancy for your trade in both versions, the first target and the second target (second target could be a trailing stop as well). The second target will have the higher expectancy per trade, because otherwise you would exit the whole position at the first target. However if you stay all in, you will have a larger dispersion of your results, as some of the positions will be stopped out. So you may opt to scale out, although this reduces your expectancy for the trade, because you may get a better Sharpe Ratio.

2. Discretionary Trading: Crowding Signals that the Move Could Be Over

Scale out after the market has signalled that the move might been over. If I am long and price is approaching resistance, then accelerating with a high volume wide ranging bar and hits resistance, I scale out and take part of my profits. A similar sign would be a churn bar and/or a narrow trading range. I am scaling out, because the probability that the move continues has changed, not because I want to reduce my risk.

3. Psychological Comfort and Increased Trading Opportunities

Just taking half of the profits, set stop to break-even, and you are out of the danger zone. Playing with the money of the house, you can let your profits run and catch a larger move then and now. Also you can now look for new opportunities. This is rarely taken into account, when backtesting a system. How long does the system stay in the market and how often does it trade? Ideally I want to have a large number of quick moves that make money, and not a slow moving position, which keeps me out of other trades. I want a quick rotation of my working capital.

Personally I have never so far used the option 1, I often push the exit button if resistance is approached - but these are planned scale-out targets, or if I feel uneasy because the market is not doing what I anticipated and my scenario is no longer valid.

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 ZTR 
 
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With my SIM work I have found it is essential to scale in and out. Otherwise a trade like this is impossible, you would effect the market in a very disadvantageous way.

One day hope to find out if moving moving 100 contracts in the lesser traded instruments (YM, CL & 6e) is possible.

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 Jeff Castille 
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Expectancy.........hmmmmmm........the amount or distance you think a market move will take you........based on what? Your historic research? Your presumption? Your arrogance?

There is no trader alive that can tell how far any entry signal will take them. You can't set some arbitrary Risk/Reward ratio and expect the market to comply. All you can do is know when you are wrong (correct stop placement) and take profits (first and second targets) and trail your stop as the trade moves in your favor.

Is this intentionally reducing your profits for psychological relief? NO !! This is common sense.

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 Fat Tails 
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Jeff Castille View Post
Expectancy.........hmmmmmm........the amount or distance you think a market move will take you........based on what? Your historic research? Your presumption? Your arrogance?

There is no trader alive that can tell how far any entry signal will take them. You can't set some arbitrary Risk/Reward ratio and expect the market to comply. All you can do is know when you are wrong (correct stop placement) and take profits (first and second targets) and trail your stop as the trade moves in your favor.

Is this intentionally reducing your profits for psychological relief? NO !! This is common sense.


Come on. If you have a backtested system with fixed rules, you do have an expectancy for each trade, which is the expected profit per trade of your backtest. You can also backtest a trailing stop. I am not setting arbitrary ratios. If you have two separate strategies for exits - the scale out (target 1) and the trailing stop - the risk profile of the combined strategy can be better than the risk profile of each individual one. So don't call this arrogance, please. I was just responding to the idea of Zoethecus to reduce risk.

And yes, I am often taking profits on half of my position for relief. Once I have done this I can reevaluate the situation without suffering from bias associated with the position. If need, I can also reenter the trade.

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 Fat Tails 
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ZTR View Post
With my SIM work I have found it is essential to scale in and out. Otherwise a trade like this is impossible, you would effect the market in a very disadvantageous way.

One day hope to find out if moving moving 100 contracts in the lesser traded instruments (YM, CL & 6e) is possible.

Do you have plans to become the first-ever 100 lot crude oil scalper? I think there is a lot of research done on trade execution, a bunch of software companies focussing on trade execution algorithms to minimize market impact of large orders. Don't think that it is possible, to do this in the rather illquid markets you mentioned. But this is not something, I have thought of, I have never had such a problem.

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 ikew 
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Fat Tails is right.

You can have an expectancy for each trade, a fixed one without the game of scaling.

There are a few statistical papers of how far a price will move based on the time frame you trade and the instrument. (I will try to find it and post a link)

If you trade a 1 min chart, dont expect to make 70 ticks per move, statisticly <10 is expected based on your system. If you trade an hourly or a daily chart, you can look for a larger move per trade. Its all statistics and math. See how Jim Simon build his funds. His systems trade miliseconds and take a fraction of penny. Soros traded the BP for months and took a billion on a trade.

So yes, a trader should have expectancy for each trade he takes.

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 Jeff Castille 
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Fat Tails View Post
Come on. If you have a backtested system with fixed rules, you do have an expectancy for each trade, which is the expected profit per trade of your backtest. You can also backtest a trailing stop. I am not setting arbitrary ratios. If you have two separate strategies for exits - the scale out (target 1) and the trailing stop - the risk profile of the combined strategy can be better than the risk profile of each individual one. So don't call this arrogance, please. I was just responding to the idea of Zoethecus to reduce risk.

And yes, I am often taking profits on half of my position for relief. Once I have done this I can reevaluate the situation without suffering from bias associated with the position. If need, I can also reenter the trade.

Hey Fattails,

My previous post was not in response to your post. None of what I said was directed at you.

My "expectancy" for any given entry signal is minimal......thus this minimal expectation is the place for my first target......I have "backtested" and have determined that any "edge" that I have will more often than not reach my first target. Beyond that my "backtesting" has also determined what a second target might be.......but I have NO assurance that this objective will be reached. I just want to make myself "available" for any further moves in my favor by having a second target and ideally trailing a stop from there if there is a really big move.

As far as "backtesting" goes........each moment in the market is unique......therefore what it has done in the past has NO bearing on what it might do on a current trade.......to think that we know how far the market might move or to say since we want a certain r/r that a certain target must be reached.......that's arrogant.....the market doesn't care what our desired r/r is.......we just need to take what it gives us

I believe that the psychological relief that we feel when early targets are reached and stops are moved up is a secondary benefit to scaling out NOT the primary objective.

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 David_R 
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I've struggled with this and still am not sure how to deal with it, but I think scaling out is definitely the more "comfortable" approach. I think we need to take profits as the market gives them to us. We never really know where the market may stop going in our direction. I guess if the probabilities of ones system shows that expected targets get hit more often than not, then one could hold for bigger moves.

As far as scaling in goes I'm not sure about that. I'm certainly not a fan of adding contracts as a trade moves away from my original entry. That may be a method in and of itself that requires certain skill. I'd be more inclined to add as the trade moves my way or on a retrace. Ultimately I don't care if I make all the ticks on all the contracts. If my trade works out well where catch a decent move on the last third or quarter then that's a great trade and may be all I need for the day. Looking back in hind sight and saying I wished I held them all for the move is useless. Isn't it?


D

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 aslan 
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Jeff Castille View Post
Is this intentionally reducing your profits for psychological relief? NO !! This is common sense.

Depends how you are trading. If you have a system that is back tested and you have an optimal target, there is no reason to scale out if you are trading the system. Now if you are mixing "discretionary" in on the exits, that is another matter, but I would still argue it is likely psychological relief because you can not trade the system.

Now, you can have a system that has multiple targets, but that is really trading multiple systems, as each target has different stats. I would called that planned scaling out.

There are a number of different things in play here. One is risk management, and cutting risk is important, and scaling out achieves that. Trading in size, also requires scaling depending on the market and the size.

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 ollie 
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I do not view it as scaling in or out, but rather reaching profit targets. As a result of using targets I have become more consistant in my trading keeping more money.

Keep things as simple as possible, but no simplier. Albert Einstein

If you can't explain it to an eight year old it's to complicated
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 ZTR 
 
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Fat Tails View Post
Do you have plans to become the first-ever 100 lot crude oil scalper? I think there is a lot of research done on trade execution, a bunch of software companies focussing on trade execution algorithms to minimize market impact of large orders. Don't think that it is possible, to do this in the rather illquid markets you mentioned. But this is not something, I have thought of, I have never had such a problem.

All of my large trades were enter one click at a time with 1 car If you look at the bars I am aiming for less than 10% of the bar.

Yes, currently this is a pip(e) dream. But can easily be done in ES. I have done two live trades in YM with 10 and 20 contracts. Only 2 in several months. One with 2,3,5 entry and 2 5 car stops. But once I prove to myself in August that I am consistently profitable with 2 cars, will think about going to 5 in September and 10 in October. Again these will be done 1 click/1,2,or 3 cars. Ninja handled this well on the 2 occasions I mentioned above.

This was live $$$

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 jagui 
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When I started trading live, I used to do all-in and all-out at a near clear target (recent swing h/l, S&R, channels, ...).
Then I started to notice the big moves I was missing and begun to follow every moves until the end.
Soon I realized that only one big move occurred every 6 or more trades, and those trades without the big move closed almost b/e, even if some profit was possible.

So now I close 2/3 at the first target, and let the remaining 1/3 run until I can.
This way I can profit from both small and big moves, maximizing profits while being more confortable.

It is only logically true that scaling out reduces your exposure to profits; the reality is that most of the times the market is willing to give you only a small profit, so I believe that letting run only a small part of the position produces more profits in the end, and smooths the equity curve... at least this is what happened to me.

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 Jeff Castille 
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ollie View Post
I do not view it as scaling in or out, but rather reaching profit targets. As a result of using targets I have become more consistant in my trading keeping more money.

Hey Ollie,

When you reach your targets do you take off all or just part of your position?

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 Trader.Jon 
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Fat Tails View Post
And yes, I am often taking profits on half of my position for relief. Once I have done this I can reevaluate the situation without suffering from bias associated with the position. If need, I can also reenter the trade.

But dont you also show bias this way? IF you take off half your position will you actually 'admit' that you were wrong by re-entering: and how do you feel about re-entering at a higher price?

Do understand I am saying as devil's advocate because I am trying to sort out this whole (and very interesting) discussion! I dont think there is a real 'right' or 'wrong': Monte Carlo the results or not !! Will previous resistance be broken or stronger than ever? Will you get slippage, will your stop be hit even if the bar never gets to that price, will your loved one fall and hit their head and you forget to hit the flatten button ... sorry, crazy mode now off ..

So here is my scenario to throw out there, untested, top of the head wiseguy eyeball memory, never before really thought about, inspired by this thread and misc other inputs during the last week .... 5 contracts, units, multiples, whatevers .. enter 2 contracts as runners with highest possible targets based on the trading range for the instrument over the last XX days/hours/weeks whatever, and trail with wide stop ... if the trend shoots off just hold the suckers until they rebound off a resistance line and Super Trend tells you to close out and go to lunch .. if there is a retracement shortly after entry, have 3 more contracts (staggered targets) and enter just above breakeven on limit order, with smaller targets, but dont cover until you have a show that you have some weakness ... leave a 'deadman' stop at BE + 2 ticks after you are 20% towards your largest target .. go to lunch and let the trailing stop (different for each target here!) disappoint you as it always does ...

TJ

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  #38 (permalink)
 TheWizard 
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I was surprised there wasn't a radio button for voting for:

Scale in, All out.

My recent preferred method.

After all, it's what you learn AFTER you know it all, that counts!
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 ollie 
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Jeff Castille View Post
Hey Ollie,

When you reach your targets do you take off all or just part of your position?

Jeff,

So sorry for late response, I went on vacation.

I trade TF, 2 contracts, sell 1 contract at 5 ticks, sell 2nd contract at 10 tick profit. I find this to be a relatively "easy" and "stress free" way to make 15 ticks. I know I leave alot of money on the table, I would rather be consistant. After all there is always another trade waiting to happen.

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 emini_Holy_Grail 
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what is SL? and what happens both hits SL?

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  #41 (permalink)
 ollie 
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emini_Holy_Grail View Post
what is SL? and what happens both hits SL?


I use range bars aset at 4. SL is 6 ticks, If SL is hit it's $120 loss.

I know what you will respond. You are risking $120 loss to make $150 profit. Why not buy 1 contract, at 5 tick profit buy 2nd contract and sell both at 10 tick profit. It's the some 15 tick profit, however it is reducing potential loss by half. Your point is very well taken and very valid.

I have been doing it my way since the beginning, and it wasn't until I wrote out "your respones" that I see a way to reduce potential loss. That's the great thing about trading, ask ten people how they do it and you'll get ten different answers and none of them wrong. Howeve we can all learn from one another.

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Fat Tails View Post
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.

Fat Tails.

I have been reading this thread with great interest. As a purely systems trader, not looking for psychological comforts in each trade, but looking for over all 'edge" in a series of trades, I have been gravitating towards all in and all out approach, using the best possible risk to reward strategies over time.

However, that being said, I ran into this article by Dean Hoffman:

(I am not able to include the link as I am a new member of this Forum but you can Google "Improving Performance Results by Dean Hoffman" and this will take you directly to the pdf article.)

which finally seems to give a possible argument for scaling out (partial exits) based purely on reducing drawdown and increasing the Net Profit to Drawdown ratio. I find this possibility fascinating and wonder if any one has tested their system with this variation as shown. (As you can see no discussion on psychology or comfort levels, but just stats)

Would love to hear people's actual systems experience on this.

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 Fat Tails 
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Let me add the document here, so it can be discussed.

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 baruchs 
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Systems trader View Post
Fat Tails.

I have been reading this thread with great interest. As a purely systems trader, not looking for psychological comforts in each trade, but looking for over all 'edge" in a series of trades, I have been gravitating towards all in and all out approach, using the best possible risk to reward strategies over time.

However, that being said, I ran into this article by Dean Hoffman:

(I am not able to include the link as I am a new member of this Forum but you can Google "Improving Performance Results by Dean Hoffman" and this will take you directly to the pdf article.)

which finally seems to give a possible argument for scaling out (partial exits) based purely on reducing drawdown and increasing the Net Profit to Drawdown ratio. I find this possibility fascinating and wonder if any one has tested their system with this variation as shown. (As you can see no discussion on psychology or comfort levels, but just stats)

Would love to hear people's actual systems experience on this.

I'm a system trader myself, and I strongly believe that scaling In or Out is WRONG!
My argument is this:
You can split the scaling trade into two trades. One with a small profit and one with a bigger profit and a break even if you like. Now back test each trade. Without knowing the specific setup, I know that one of the trades will be much better than the other, so why do both?
In another thread I explained that the biggest profit you get by combining several strategies or instruments or time frames, but you need to have non correlated or negative correlated outcomes. Scaling out/in will be very strongly correlated.

Baruch

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 Fat Tails 
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It is not an easy task to comment on that article

(1) Dean Hoffman presents a trend following system applied to a portfolio with the following key figures:

Net profit $ 673,307, Max. Drawdown $ 60,504, Winning percentage 36.1%, Avg $Win to Avg$Loss 4.44

(2) Then he suggests trading two contracts instead of one and comes up with the key figures

Net profit $ 1143,307, Max. Drawdown $ 69,015, Winning percentage 38.0%, Avg $Win to Avg$Loss 3.75



Are the figures correct?

At first glance, the figures are consistent. Winning percentage and Avg $Win to Avg $Loss and profit per contract are similar for both systems. The striking point is the reduced drawdown. And of course this is possible as well, so I think that the figures are correct and consistent.


Does the second system catch superior returns without increasing risk?

What is not obvious is that the max. drawdown is a proxy for risk-of-ruin and that the superior return of the second system is risk-free and you are therefore entitled to trade 2 contracts instead of one without increasing the risk.


2 contracts of one instrument traded

Let us imagine that we trade 2 contracts of a single instrument. In this case the drawdown is the result of a series of n consecutive trades with a combined loss, which is the drawdown. Now, if you scale out 1 contract by using a first profit target, some of these losses might have been reduced to less than half the size (as we have already scaled out half the position with a small winner and the loss is reduced to 50%), others would be double size (as they did not reach the scale out target).

Let us assume - for simplicity reasons - thath the max. drawdown was made up of 4 consecutive losers, out of which 2 never reached the first profit target and 2 others did. In this case the No-Scale-Out-System trading 2 contracts would have made a loss of 4*2R = 8R, while the Scale-Out-System would have made a loss of 2*2R + 2*R - 2*PT1 = 6R - 2PT1. If you further assume that the scale-out profit target sits at +R, the drawdown of the second system becomes indeed 4R, which is half of the drawdown of the first system.

So the dispersion of the results of the second system is indeed smaller. The standard deviation of the returns from the expectancy is smaller, and the Sharpe Ratio is better. Both allows for trading larger size.


Add the Portfolio Effect

If you only trade 1 instrument and increase size, the results are 100% correlated with themselves. The portfolio effect -trading different instruments that are less than 100% correlated - further reduces risk. This again allows to increase size.

I do not know whether the presented system trades only 1 contract at the time or whether it allows to open several positions over different instrument with a low correlation of returns. But I believe that the drawdown should be further reduced by the portfolio effect, if several positions are held at the same time.


Conclusion

The improved risk profile is due to the effect that negative and positive trades can cancel out

- if you trade 2 different system with a sufficiently low correlation
- if you trade a portfolio of different instruments

The catch with the described system is that it does have a low winning percentage and will therefore likely have a series of 6, 7 or 8 consecutive losers. So the scaling-out will have a positive impact on risk even without the portfolio effect. This would not necessarily be the case for a scalping system with a high winning percentage.
But system with a higher winning percentage have lower drawdowns anyhow, so that you can increase the size without scaling out.

Yes, I agree with the author.

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 Fat Tails 
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baruchs View Post
I'm a system trader myself, and I strongly believe that scaling In or Out is WRONG!
My argument is this:
You can split the scaling trade into two trades. One with a small profit and one with a bigger profit and a break even if you like. Now back test each trade. Without knowing the specific setup, I know that one of the trades will be much better than the other, so why do both?
Baruch

The question here is indeed correlation. The performance maybe greatly enhanced, if not correlated. I think I showed with my previous post, that scaling-out / drawdown can be led back to the following two cases

(1) prior to drawdown 1st profit target is reached -> 100% negative correlation, drawdown is reduced
(2) prior to drawdown 1st proft target is not reached -> 100% positive correlation, drawdown is identical

I think that the positive effect on risk cannot be derived from a single trade, but a series of trades. It is the series correlation that changes. The correlation is further reduced, if a portfolio of instruments is traded.

But your conclusion is correct. Rather than scaling out, you can find an entirely different strategy, which is less correlated with the original one than the scale out strategy and this will improve the Sharpe Ratio even more!

But in case you are trading a portfolio, the scaling out is already good enough, to reduce your risk by 50%, if Dean Hoffmann's calculations are correct.

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 baruchs 
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Fat Tails View Post
The question here is indeed correlation. The performance maybe greatly enhanced, if not correlated. I think I showed with my previous post, that scaling-out / drawdown can be led back to the following two cases

(1) prior to drawdown 1st profit target is reached -> 100% negative correlation, drawdown is reduced
(2) prior to drawdown 1st proft target is not reached -> 100% positive correlation, drawdown is identical

I think that the positive effect on risk cannot be derived from a single trade, but a series of trades. It is the series correlation that changes. The correlation is further reduced, if a portfolio of instruments is traded.

But your conclusion is correct. Rather than scaling out, you can find an entirely different strategy, which is less correlated with the original one than the scale out strategy and this will improve the Sharpe Ratio even more!

But in case you are trading a portfolio, the scaling out is already good enough, to reduce your risk by 50%, if Dean Hoffmann's calculations are correct.

Hi Fat Tales,
This is not how I look @ correlation.
Lets examine a scaling out trade in which after taking the first target you move your stop to break even (just because this is what most people do, although its wrong too)
In this trade we can have 3 outcomes:
1. We were stopped out - correlation = 1
2. We reached the high target - correlation = 1
3. We reached first target, moved stop to break even and were stopped out - correlation = 0.
So the cumulative correlation is close to one.
But I don't measure the correlation this way, because I don't do scaling. I measure the correlation of daily PnL of different strategies / TF / instruments. Thats what is important.
So if in theory you have two strategies with correlation = -1, that means that on each day if you are in profit in strat#1 you lose in strat#2 and visa versa.
In this situation even if one of the strategies is a losing strategy you are much better off by trading it together with the winning one. But if the strategies are strongly correlated, as scaling is, then don't trade the losing strategy!

Baruch

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 Fat Tails 
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baruchs View Post
Hi Fat Tales,
This is not how I look @ correlation.
Lets examine a scaling out trade in which after taking the first target you move your stop to break even (just because this is what most people do, although its wrong too)
In this trade we can have 3 outcomes:
1. We were stopped out - correlation = 1
2. We reached the high target - correlation = 1
3. We reached first target, moved stop to break even and were stopped out - correlation = 0.
So the cumulative correlation is close to one.
But I don't measure the correlation this way, because I don't do scaling. I measure the correlation of daily PnL of different strategies / TF / instruments. Thats what is important.
So if in theory you have two strategies with correlation = -1, that means that on each day if you are in profit in strat#1 you lose in strat#2 and visa versa.
In this situation even if one of the strategies is a losing strategy you are much better off by trading it together with the winning one. But if the strategies are strongly correlated, as scaling is, then don't trade the losing strategy!

Baruch

You made a slightly different assumption, with the adjustment to breakeven, which is probably a better idea.

But in my opinion you missed the principal point, which is the correlation not between strategy one (original) and strategy two (taking profits early) but

- the correlation between different consecutive trades, leading to the interruption of a chain of losers
- the correlation on the portfolio level, when the 2 strategies are applied to various instruments at the same time

Both effects contribute to reducing the dispersion (standard deviation of the results from the mean expectancy) and therefore reduce the risk of a major drawdown and the risk of ruin.

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 Linds 
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I havent got hard statistical data to back this up but based on my experience and learning, my opinion is that all in / scale out can work strategically for advanced traders but mostly it is used by learning traders to ease the short term psycholgical stress of being in a trade. In this case I would argue that it is a counter productive strategy because a learner most likely wont have above 1:1 risk/reward on a set of trades. A couple of full stops will wipe out several small wins. I think if a trader has achieved a very high win % to the first profit target level ( say around 80% or better) then a scale out approach can work quite well by taking lots off at predefined SR levels and catching the odd big runner...but for those trading a lower win % method ( like 50%) I doubt it is of any use except to feel good intratrade while you watch your account balance fall.

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 emini_Holy_Grail 
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Pl pardon my ignorance.

can someone explain how this works "All in all out vs. scaling in and out"
thks and appreciate

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 Massive l 
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For tighter ranges, (10-20 ticks) I'm all in all out
For wider ranges, I'm all in scale out
For trends, I'm all in/scale in, scale out

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 emini_Holy_Grail 
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Thks Massive

while you scale in, I guess we add (scale in) 2nd and 3rd pos, as price "retrace" and gives better entry price than the 1st entry price? say, if you enter 1st CL at 93.20 and if price retrace to 93.10, adding 2nd contract so avg entry becomes 93.15, better entry for both. is this right?

I see someone say they add 2nd pos after 1st pos gains 5 ticks, but that makes the 2nd, entered at 5 ticks later though, increasing the risk if price reverse and hit stop loss

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 Massive l 
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emini_Holy_Grail View Post
Thks Massive

while you scale in, I guess we add (scale in) 2nd and 3rd pos, as price "retrace" and gives better entry price than the 1st entry price? say, if you enter 1st CL at 93.20 and if price retrace to 93.10, adding 2nd contract so avg entry becomes 93.15, better entry for both. is this right?

I see someone say they add 2nd pos after 1st pos gains 5 ticks, but that makes the 2nd, entered at 5 ticks later though, increasing the risk if price reverse and hit stop loss

I let price tell me what to do.

A low risk entry and I'm all in but a higher risk entry, I'm expecting some drawdown so I don't go all in at first.
My strategy that I use the most is low risk high reward (with the trend) and low risk low reward (against the trend).
Different market conditions require different strategies. I don't add to positions based on ticks, I add based on the action. I go into the trade with a plan with exact numbers but as price and volume dance, I may alter my plan accordingly.

I use mechanical and high probability setups, but I manage my trade in a discretionary manner.
I have a plan to manage the trade with exact numbers but as price unfolds and I receive more information,
I may alter the way the trade is being managed.

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 Massive l 
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emini_Holy_Grail View Post
I see someone say they add 2nd pos after 1st pos gains 5 ticks, but that makes the 2nd, entered at 5 ticks later though, increasing the risk if price reverse and hit stop loss

Yes, you are correct. You would be increasing your risk if you only entered on 1 lot whch gives you no chance to lock in profits.
But if you enter on multiple lots, you can take profits on your first target and if price has a pullback,
you can add back your lot using the same risk you had previously by adjusting your stop.

For example, if you enter 1 lot /TF short say 825 with your stop at 827 and your first target at 821
then you are set up (theoretically) 1:2 risk reward.

But if you hit your first target and cover 1 lot you are +40 ticks (1 lot, 4 points) but if
price reverses on your last 2 lots then you lose -40 ticks (2 lots at 2 points each) making that a scratch trade.

You are not risking anything after you covered your first target because you already secured 40 ticks.
This is managing your risk. If price agrees with your analysis and continues down then you are on a free ride
while bumping that risk/reward way up which gives you the opportunity to add to your position and move your stop to breakeven or even above to lock in profits.

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 emini_Holy_Grail 
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Massive
thks for explaining. yes I do like to add when price pullbacks and not when the price is moving ahead in the direction of the trend. I am not comfortable adding this way and is just quest of fear that newly added will have more chance to hit SL, as the entry price wasn't as good as the initial one

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 emini_Holy_Grail 
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also, when SL hit on all 3 lots, without even hitting 1st target (6 ticks 6E) , that brings my psyche down
only way is to look for next better entry. any other idea ? to offset this loss?

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 monpere 
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emini_Holy_Grail View Post
also, when SL hit on all 3 lots, without even hitting 1st target (6 ticks 6E) , that brings my psyche down
only way is to look for next better entry. any other idea ? to offset this loss?

That's the problem with this style of money management, when you are dead wrong about a trade you get punished severely (full stop on multiple lots). When you are somewhat right about a trade you get zilch (+40 -40, scratch). When you are absolutely right about a trade is when you get paid, partially (all scaleouts make less then full profit). This means, that you better be totally right a large percentage of the time, or insure that you catch every large move in the market which this method capitalizes on. Since these moves naturally do not happen as much as smaller moves, if you miss one of these large moves, because you were taking a bathroom break, you are screwed for the day. You are requiring the market to do something beyond ordinary, in order to profit. If you are a so-so trader, I think this approach will probably kill you.

On the previous example, how about instead of taking +40 ticks on the 1st scaleout, and then -40 ticks on the 2nd scale out resulting in a scratch. How about trading 1 lot, take your +40 ticks, and wait for the next trade? Instead of adding on, on the next pullback, how about just waiting for that pullback and enter a new trade with +40 ticks already in your pocket, with no risk of it being taken away, and without needing to pray for another 10 ticks up before the next pullback? ...Just the other side of the coin.

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 emini_Holy_Grail 
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Monpere
- I already do what you suggested in the 2nd example., like trade 1 lot,. exit one trade with either profit or SL, then wait for next trade again with 1 lot, as not every entry can be wrong in 1st hour, from my exp.
I was wondering how scale in and out is done,. I may like scale out at some time after some testing, but I am not comfortable in "scaling in"
thks for your input and appreciate it

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 Massive l 
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monpere View Post
That's the problem with this style of money management, when you are dead wrong about a trade you get punished severely (full stop on multiple lots). When you are somewhat right about a trade you get zilch (+40 -40, scratch). When you are absolutely right about a trade is when you get paid, partially (all scaleouts make less then full profit). This means, that you better be totally right a large percentage of the time, or insure that you catch every large move in the market which this method capitalizes on. Since these moves naturally do not happen as much as smaller moves, if you miss one of these large moves, because you were taking a bathroom break, you are screwed for the day. You are requiring the market to do something beyond ordinary, in order to profit. If you are a so-so trader, I think this approach will probably kill you.

On the previous example, how about instead of taking +40 ticks on the 1st scaleout, and then -40 ticks on the 2nd scale out resulting in a scratch. How about trading 1 lot, take your +40 ticks, and wait for the next trade? Instead of adding on, on the next pullback, how about just waiting for that pullback and enter a new trade with +40 ticks already in your pocket, with no risk of it being taken away, and without needing to pray for another 10 ticks up before the next pullback? ...Just the other side of the coin.

Definitely. That's a good call.
I guess it depends on your skill, experience, and the current market conditions/setup you are trading.
One of the traders I've learned from over the years has been at it full time for 5 years; turned
5k into who knows how much but I know he places 20k+ trades regularly. To say the least
he's been very proficient at selling in stages while building his account.

He trades areas of consolidation and doesn't buy his lots all at once. He buys them as the consolidation
progresses. When it's time to fly and the break goes in his direction (which it does a high percentage of the time),
he sells in stages.

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 monpere 
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Massive l View Post
Definitely. That's a good call.
I guess it depends on your skill, experience, and the current market conditions/setup you are trading.
One of the traders I've learned from over the years has been at it full time for 5 years; turned
5k into who knows how much but I know he places 20k+ trades regularly. To say the least
he's been very proficient at selling in stages while building his account.

He trades areas of consolidation and doesn't buy his lots all at once. He buys them as the consolidation
progresses. When it's time to fly and the break goes in his direction (which it does a high percentage of the time),
he sells in stages.

There are some discretionary traders out who have an innate ability to read the market, and be in tune with it, and they've been able to develop that ability into a fine tuned skill. A skill that the great majority of us will never achieve. The problem is every newbie trader who opens an account, thinks they are going to be that guy, and they find out soon enough, just because it comes easy to that guy, does not necessarily mean it will be the same for the rest of us

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 Massive l 
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If anyone thinks they can step into this game and make a killing
without the thousands of hours of dedication (and money), they are dead wrong.

Don't step into a lion's den and expect to sit down to a cup of tea.
If someone is dumb enough to think that, well...nature will run its course

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 Bermudan Option 
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emini_Holy_Grail View Post
Thks Massive

while you scale in, I guess we add (scale in) 2nd and 3rd pos, as price "retrace" and gives better entry price than the 1st entry price? say, if you enter 1st CL at 93.20 and if price retrace to 93.10, adding 2nd contract so avg entry becomes 93.15, better entry for both. is this right?

I see someone say they add 2nd pos after 1st pos gains 5 ticks, but that makes the 2nd, entered at 5 ticks later though, increasing the risk if price reverse and hit stop loss

I think the first example is more averaging down while the second example is scaling in.

Scaling in is when price action confirms a move and you add to the position
Averaging down is when the price goes against you but you are 'sure' it will reverse so you add to the position.

I never really understood the mental process of averaging down. I mean, I understand why people do it, but logically, if you expect the market to go down and will purchase more when it does, why not wait for it to go down before entering? That way your buying power will be optimal when you enter the market instead of partially depleted.

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 Massive l 
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Bermudan Option View Post
I think the first example is more averaging down while the second example is scaling in.

Scaling in is when price action confirms a move and you add to the position
Averaging down is when the price goes against you but you are 'sure' it will reverse so you add to the position.

I never really understood the mental process of averaging down. I mean, I understand why people do it, but logically, if you expect the market to go down and will purchase more when it does, why not wait for it to go down before entering? That way your buying power will be optimal when you enter the market instead of partially depleted.

I agree. Don't buy into a market that's being marked down.

I sometimes fade trends but only after I have seen key signs of weakness in an uptrend
or strength in a downtrend. I never average down or up in either case.

Sometimes I catch a top/bottom and sometimes I only get a point or two.
My initial setup is never more than 1:2. I've grabbed a few 1:10 when it's ran though.
Low risk high reward fade IMO.

I'm no expert though and always learning. I've made a lot of mistakes over the years!

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 monpere 
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Bermudan Option View Post
I think the first example is more averaging down while the second example is scaling in.

Scaling in is when price action confirms a move and you add to the position
Averaging down is when the price goes against you but you are 'sure' it will reverse so you add to the position.

I never really understood the mental process of averaging down. I mean, I understand why people do it, but logically, if you expect the market to go down and will purchase more when it does, why not wait for it to go down before entering? That way your buying power will be optimal when you enter the market instead of partially depleted.

I think averaging down is a losing game if you are day trading. But if you are long term trading, it can be an excellent way to build a large position, while improving your average entry price.

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 liquidcci 
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monpere View Post
I think averaging down is a losing game if you are day trading. But if you are long term trading, it can be an excellent way to build a large position, while improving your average entry price.

I agree in day trading that is one of fastest ways to burn up your account.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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 Bermudan Option 
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monpere View Post
I think averaging down is a losing game if you are day trading. But if you are long term trading, it can be an excellent way to build a large position, while improving your average entry price.

Hmm. I've always wondered about this.... A 1% stop loss on total portfolio value vs a averaging down in preparation for a bottom:

Let's say we have a starting amount $100,000 and the average down-er somehow cannot guess the bottom of the stock but he can guess the amount of tries needed to anticipate the bottom. He makes four purchases @ $25,000 each and then can ride the bullish elevator back up. The trader who constantly enters and exits the market is putting all his chips on the table but exiting after a 1% loss. Price went from 50 to 35 in 5pt increments.



Averaging down:
First purchase: 500 shares. Total of 500 shares @ 50
Second purchase: 555 shares. Total of 1055 shares @ 47.39
Third purchase: 625 shares. Total of 1680 shares @ 44.6
Final purchase at successful bottom = 714 shares @ 41.77
Total of 2394 shares invested at $35 with a cost basis of 41.77



Stopped out and re-entering:

First purchase: 100,000. Stopped out at 1% loss
Second purchase: 98,010 stopped out at 1% loss
Third purchase: 97,029 stopped out at 1% loss
Fourth (Successful) purchase: $97,029 available for a purchase
Total of 2772 shares purchased at $35 with a cost basis of $35

Of course, this is just a crude example that doesn't take into effect advantages of holding long term such as possible dividends and long term capital gains taxation, but off the top of my head, it doesn't seem like a viable strategy.

Sticking to getting stopped out allows you to have a lower cost basis and a larger buying power when it really matters.

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 DarkPoolTrading 
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Currently I trade all in - scale out. However for a while now i've liked the idea of scaling in purely because you have the least risk exposure at the start of the trade. I've since started looking at various scenarios and scaling in techniques but so far have been unable to find anything that has a mathematically edge over All In. Yet I can't shake the idea that scaling in is ultimately the best option.

I've heard countless times that the pro's add size as a position moves in their favor. That when the amateurs are exiting, they're adding more, etc...

But i've gone through several different scenarios of scaling in vs all in approaches and have been unable to find a scale in approach that is more profitable. In each scenario I go through what would happen if:
-All targets are reached
-Full stop out
- One target is reached then stopped out

The possible trade management approaches are countless. Personally it makes sense to me to enter one lot initially and then based on how the market structure develops, add more. But again, I have been unable to find a way to do this so far that makes sense.

I know @FuturesTrader71 talks about campaigning around a position. So this is essentially a scale in - scale out approach that he has developed.

In the webinar on futures.io (formerly BMT) done by @Private Banker he talks about trading a core and satellite position. Again, this is a form of scaling in that he has developed.

I may be mistaken, but im fairly certain i've seen @Big Mike mention that he scales in.

So that's 3 very good traders (in my opinion) who all use variations of scaling in. This is an old thread so I thought I would give it a bump in the hopes that this topic can be discussed further.

Any scale-in'ers out there? Why do you scale in? Is it purely mathematical or more psychological?
Is the scale in mechanical or based on market structure?
Have you run the numbers on your trading method with various entry styles (scale in vs all in)?
etc...

Diversification is the only free lunch
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 DarkPoolTrading 
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DarkPoolTrading View Post
Currently I trade all in - scale out. However for a while now i've liked the idea of scaling in purely because you have the least risk exposure at the start of the trade. I've since started looking at various scenarios and scaling in techniques but so far have been unable to find anything that has a mathematically edge over All In. Yet I can't shake the idea that scaling in is ultimately the best option.

I've heard countless times that the pro's add size as a position moves in their favor. That when the amateurs are exiting, they're adding more, etc...

But i've gone through several different scenarios of scaling in vs all in approaches and have been unable to find a scale in approach that is more profitable. In each scenario I go through what would happen if:
-All targets are reached
-Full stop out
- One target is reached then stopped out

The possible trade management approaches are countless. Personally it makes sense to me to enter one lot initially and then based on how the market structure develops, add more. But again, I have been unable to find a way to do this so far that makes sense.

I know @FuturesTrader71 talks about campaigning around a position. So this is essentially a scale in - scale out approach that he has developed.

In the webinar on futures.io (formerly BMT) done by @Private Banker he talks about trading a core and satellite position. Again, this is a form of scaling in that he has developed.

I may be mistaken, but im fairly certain i've seen @Big Mike mention that he scales in.

So that's 3 very good traders (in my opinion) who all use variations of scaling in. This is an old thread so I thought I would give it a bump in the hopes that this topic can be discussed further.

Any scale-in'ers out there? Why do you scale in? Is it purely mathematical or more psychological?
Is the scale in mechanical or based on market structure?
Have you run the numbers on your trading method with various entry styles (scale in vs all in)?
etc...

So after spending some more time investigating scaling in this weekend, im still stumped.

It seems to me as though scaling in may be more feasible when swing trading over multiple days where trades take longer to play out and are going for larger targets. However intraday, even with the aim being to go for the major moves (ie: not scalping) I so far can't see a benefit to scaling in.

One of the main things i've been looking at is entering one lot with X risk. Then when price action develops in such a way that my stop is at least at breakeven, add another lot. In other words you're not adding just for the sake of it. You're adding because of how the market structure develops. At that point the first lot stop would be breakeven, the scaled in lot would be Y. So what would be the end result at that point:
- You have 2 lots in the market with +-half the risk
- You have reduced profit potential

So the risk has been reduced and so has the potential reward. On top of that, the 2nd lot has arguably been entered at a sub-optimal point in the market.

Another way of looking at scaling in is that the 1st lot is just a feeler to see how the market plays out initially. If the market then starts moving in your direction you add more. But in that case then why not just enter the whole position at the point where you added,...if that is a 'safer' point?

My thinking is that the point of scaling in would be one or both of the following:
- To use the profits from the 1st entry to offset the risk of scaling in the next part
- To have reduced risk at the start of the trade

Those two points make perfect sense to me, but I just cant make the maths work in such a way that scaling in is beneficial. Scaling in seems to be an extremely quiet topic which is seldom discussed in any real detail. Yet it is so common to hear pro's say they do it.

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 ratfink 
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I think it is pro's who can do it because:

a) They are typically better at identifying the current dominant trend
b) They have better money management and an account size that isn't easily compromised
c) They will only do it if previous entries are already 'safe' e.g. in profit above a 61.8 retrace or their choice of condition
d) They will only add at what are also great setups in the same trend that could have been used for a solo trade
e) They know better when the opposition (typically retail) is already in a compromised position and can take further advantage

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 xelaar 
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Great topic. I currently trade all in scale out but looking for a way to add tilo profitable position. I don't think scale in is only possible for l0ng term traders. It is possible for any style of trading where you go for multiples of risk as reward. You can either add after your initial position is safe and another independant entry has presented itself while you are still having a position, then it's a sensible thing to do. Or you might trade momentum strategy and add position as soon as first entry is protected. In any case its not for scalping or any low RR setups. IMO

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 xelaar 
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The benefit from scale in is not that you enter with half position and get a second half in at worse price but that you can double or more your position without adding more risk. Not two at once or one after another, but two at once or two after two.

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 baruchs 
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There is no such thing as scaling in/out!
If you look at it as just another trade with same entry (out) or same PT (in), then you will come to a conclusion that its biggest not logical thing to do.

p.s.
May be psychologically its OK.

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 xelaar 
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baruchs View Post
There is no such thing as scaling in/out!
If you look at it as just another trade with same entry (out) or same PT (in), then you will come to a conclusion that its biggest not logical thing to do.

p.s.
May be psychologically its OK.

I agree that scale out is not beneficial in terms of end return. But if you limit your drawdown or number of losses anyhow it might be the only thing to keep it working. Scale in is the opposite, its hard since you increase risk but it impoves the end result.

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 DarkPoolTrading 
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baruchs View Post
There is no such thing as scaling in/out!
If you look at it as just another trade with same entry (out) or same PT (in), then you will come to a conclusion that its biggest not logical thing to do.

p.s.
May be psychologically its OK.

Yes this is part of what i've been trying to understand. Because no matter how I look at it, scaling in is actually just another trade with it's own set of criteria. The fact that you happened to already be in a position doesn't change the fact that at the point of adding more,..that is a new trade.

So the only real benefit I can see for adopting a scale in strategy is to have minimal initial risk, and then once some profit has been built up, add more with the risk for that portion being mitigated by the profits from whatever is already in the market. But again,...the scale in is a new trade with it's own set of criteria.

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 xelaar 
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DarkPoolTrading View Post
Yes this is part of what i've been trying to understand. Because no matter how I look at it, scaling in is actually just another trade with it's own set of criteria. The fact that you happened to already be in a position doesn't change the fact that at the point of adding more,..that is a new trade.

So the only real benefit I can see for adopting a scale in strategy is to have minimal initial risk, and then once some profit has been built up, add more with the risk for that portion being mitigated by the profits from whatever is already in the market. But again,...the scale in is a new trade with it's own set of criteria.

Exactly. Hence you need another setup. Exception is momentum trades. But continuation of a move can be a setup in itself. Or trend trades with entries off fast emas are good option for scaling in. A variation of momentum trade

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 baruchs 
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Exactly. Hence you need another setup. Exception is momentum trades. But continuation of a move can be a setup in itself. Or trend trades with entries off fast emas are good option for scaling in. A variation of momentum trade

There are no exceptions. Its wrong, wrong, wrong.
Diversification is the Holy Grail of trading, but scaling is the worst diversification of all.
In scaling in you have same PT and same SL. In scaling out you have same Entry and same SL.
If we agree that scaling is another trade, than by scaling you actually saying: I'm such a good trader that I never invent one setup at a time. I invent them in pairs or triples.

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 ratfink 
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baruchs View Post
There are no exceptions. Its wrong, wrong, wrong.
Diversification is the Holy Grail of trading, but scaling is the worst diversification of all.
In scaling in you have same PT and same SL. In scaling out you have same Entry and same SL.
If we agree that scaling is another trade, than by scaling you actually saying: I'm such a good trader that I never invent one setup at a time. I invent them in pairs or triples.

I couldn't disagree more.

When pro's do it for the reasons I mentioned in my earlier post they are also frequently up-scaling time-frames, i.e. what was a scalp has become a comfortable day-trade, or a day-trade has become a comfortable overnight hold or longer term swing. They are also doing it because the good ones are on the right side of a squeeze and can kill retail or institutions that are scrambling to get out on the other side.

As I said before, they are not inventing multiple setups they are simply spotting and taking new setups once existing ones are already safely in profit with b/e or better stops.

Don't confuse the fact that it is hard for us to do with the opinion that it must therefore be wrong.

That's my 2c anyway.

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 xelaar 
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baruchs View Post
There are no exceptions. Its wrong, wrong, wrong.
Diversification is the Holy Grail of trading, but scaling is the worst diversification of all.
In scaling in you have same PT and same SL. In scaling out you have same Entry and same SL.
If we agree that scaling is another trade, than by scaling you actually saying: I'm such a good trader that I never invent one setup at a time. I invent them in pairs or triples.

I think you are missing a point of scale ins. If you risk say 10 ticks and go for 50, you can easily get another setups by the way to target when you original entry is protected. So it is only sensible to add to position there and place a stop on a new position as per strategy. Scaling in even more important for momentum strategies.

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 baruchs 
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I think you are missing a point of scale ins. If you risk say 10 ticks and go for 50, you can easily get another setups by the way to target when you original entry is protected. So it is only sensible to add to position there and place a stop on a new position as per strategy. Scaling in even more important for momentum strategies.

And I think you are missing the new independent trade part, but its live.

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 xelaar 
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baruchs View Post
And I think you are missing the new independent trade part, but its live.

If you treat them as separate trades - then there is no even reasons to discuss it. Trade as per your plan.

However most long term strategies work exclusively with scale-in, as they require gradual positioning into the market.

It can be very beneficial for swing traders as well.

Most retail people in futures though are scalpers so it does not apply to them.

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 baruchs 
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If you treat them as separate trades - then there is no even reasons to discuss it. Trade as per your plan.

However most long term strategies work exclusively with scale-in, as they require gradual positioning into the market.

It can be very beneficial for swing traders as well.

Most retail people in futures though are scalpers so it does not apply to them.

Let me ask you few questions. When you answer them to yourself you should see my point.
Suppose you have one great setup, which includes scaling (in or out or what ever). Let decide for this exercise on scaling in one contract. Let suppose it makes you 10K per month.
Q1: Is it possible that one of the setups makes you consistently 20K and another loses 10K?
Q2: How would you know the answer to Q1?
Q3: If this is the case and you knew it, would you still trade the losing setup?

p.s.
I know that in your case it can not happened. Its just a hypothetical exercise.

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 xelaar 
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baruchs View Post
Let me ask you few questions. When you answer them to yourself you should see my point.
Suppose you have one great setup, which includes scaling (in or out or what ever). Let decide for this exercise on scaling in one contract. Let suppose it makes you 10K per month.
Q1: Is it possible that one of the setups makes you consistently 20K and another loses 10K?
Q2: How would you know the answer to Q1?
Q3: If this is the case and you knew it, would you still trade the losing setup?

p.s.
I know that in your case it can not happened. Its just a hypothetical exercise.

I think you only listen to yourself.

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 DarkPoolTrading 
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ratfink View Post
When pro's do it for the reasons I mentioned in my earlier post they are also frequently up-scaling time-frames, i.e. what was a scalp has become a comfortable day-trade, or a day-trade has become a comfortable overnight hold or longer term swing.

This is an interesting point and may be why scaling in with pure day trading isn't commonly done. There may just not be enough price structure through the course of a day to scale in unless you have a strong trend day. However if you are swing trading, then what may initially start out as a day trade may turn into a swing trade depending on how the market structure develops.

With that said, there are certainly pure day traders who scale in, but im guessing they only do it on trend days. If not, I just can't see how the maths works out.

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 ratfink 
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DarkPoolTrading View Post
This is an interesting point and may be why scaling in with pure day trading isn't commonly done. There may just not be enough price structure through the course of a day to scale in unless you have a strong trend day. However if you are swing trading, then what may initially start out as a day trade may turn into a swing trade depending on how the market structure develops.

With that said, there are certainly pure day traders who scale in, but im guessing they only do it on trend days. If not, I just can't see how the maths works out.

Yes, exactly. For example I see it most often now when the 6E algos trail using the same extension anchor to larger target, some will have taken profits and some will have held a truckload on. Watching an ES/Dax intraday squeeze is still a thing of beauty though too. One day, ha.

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 Fadi 
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Interesting thread revived thank you guys!
It is always a great refresher.

I have a question for those trading "all in /scale out" as it seems the mostly voted method on the poll:
1. do you have actual statistics that you can share on probability of success reaching your target 1 and your target 2?
2. do you have actual statistics that you can share on how far your target 2 ends up being compared to target 1 and versus stop distance (on average)?

I am thinking for example, (for sake of simplicity) if you take 2 contracts long on the ES and set the following:
1. initial stop -2 points on both contracts
2. first target +2 points on one contract
3. second target +4 points on the second contract

Let's say also, that as soon as you reach first target you also place a break-even stop on the remaining contract.

In that case, the possible outcomes for the above trade are three:
1. trade works against you from the beginning, you get stopped out on both contracts for a loss of -2*2 = -4 points
2. price reaches first target, you gain 2 points on one contract and then it reverses back and hit your break-even stop so in the end you gain only 2 points
3. best case scenario, price hits your first target and you pocket 2 points on first contract, then price continues higher, hits your second target and gain another 4 points for a total of 6 points gained.

If we are to assign a probability of success to each outcome, how would the distribution look like if you have a 60% winning probability strategy let's say?

Would you get this by any chance?
40% chance you get stopped -> -4 points
40% chance first target is hit -> +2 points
20% chance second target is hit -> +6 points

If yes, then expectancy of the trade is 0.4 points per trade, right?

On the other hand, if I also have a 60% winning probability, and I use the same stop and target on both my contracts, ie -2pts and +2 pts per contract.

The possible outcomes would only be two this time:
1. 40% chance to get stopped out -> -4 points
2. 60% chance to hit target -> +4 points
Expectancy of that trade would be 0.8 points per trade, right?

So to have at least the same expectancy on both setups, "all in / scale out" and "all in / all out" I would have to modify my target 2, or increase the probability of hitting target 2; right?

I hope I am not too far off but please correct me if wrong, I am trying to learn and understand here.
If I increase target 2; making it wider by 2 more points let's say, then the probability of hitting it is also reduced, right? and so is the expectancy...
How do you guys go about proving that scaling out is more efficient than an all out approach if you are to apply strictly the same strategy and methodology for both cases?

Thanks in advance, and sorry for this long comment.
Eager to read your explanations.

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Fadi

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 xelaar 
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Fadi, you are talking about scalping here. Scaling is not beneficial for scalping. If you look for high probability zones and try to enter there with a small stop, trying to capture a swing, you will most likely want to scale something out. Its not statistically correct, but definetely reduces drawdowns and improves one's psyche. Stats wise the best is scale in all out. But depends on strategy too. Thus said good strategy should look to capitalize on good moves. AFAIK pros don't trade 1:1 RR, they look to get on the move even if it takes several tries.

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Phantom
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I am a all in, scale out guy. What i have observed that as time passes by, the probability of my trade keeps on decreasing. So i enter with my whole position and keep scaling out if the trade does not moves in my favour within specific time period.

This helps me to win big when i win and lose small when i lose.

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Eric B
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all in, all out - I don't want to give the market a chance to ruin my trades, after all. From a day-timeframe standpoint, I agree with the above post about there not being sufficient market structure to support scaling the overwhelming majority of the time, especially since my targets are much smaller than say, a swing/position trader whose positions are measured in days, not minutes/hours.

Adding to positions just increased my risk exposure, and I usually had to do it at bad prices hoping the market would continue it's intraday trend a bit longer - in effect, I was stuck forecasting the future beyond what I'm capable of reasonably forecasting. I prefer to have higher confidence in my trades than that!

Given the volatility and global dynamics in modern markets, where even the most unlikely thing that comes out of nowhere can change price movement in an instant, managing risk and ensuring profits are taken at their best full potential become paramount to me.

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 mabr0408 
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I believe there is a lack of context with a lot these posts concerning scaling in/out or all in/out methodology.....who says you cant you use a combination? why do all trades have to be one or the other?......the market is not black and white....why use a black and white approach?

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 PandaWarrior 
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Phantom View Post
I am a all in, scale out guy. What i have observed that as time passes by, the probability of my trade keeps on decreasing. So i enter with my whole position and keep scaling out if the trade does not moves in my favour within specific time period.

This helps me to win big when i win and lose small when i lose.

Thanks and Regards.
Phantom.

Oddly enough, my reading of the POP revealed exactly the opposite in terms of how he entered.

Perhaps you could elaborate on how you win big if you are scaling out and how you lose small if you are all in. In theory I can see a way but is like to learn from someone doing it every day.

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Phantom
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Oddly enough, my reading of the POP revealed exactly the opposite in terms of how he entered.

Perhaps you could elaborate on how you win big if you are scaling out and how you lose small if you are all in. In theory I can see a way but is like to learn from someone doing it every day.

Hi PandaWarrior,

To start with, I am a great admirer of POP. All that he said just make sense to me and this strategy of all in/scale out is based on one of POP's sayings: "Let the market tell you your position is proven correct, but never let the market tell you that your position is wrong."

So here is how I implement it when I take any position:

1. From my past trade records, I had noticed that whenever I won, the wins were quick and price would move in my favour in not more then 5min or say 2-3 bars(I trade based on 3min charts).

2. Also, as time passes by and price does not move in my favour, the probability of me being stopped out keeps on increasing.

3. Now whenever I get my valid trade setup, I enter with my max allowable position size on that setup. Now I presume that I am on wrong side and keep scaling out until I am proven correct on that particular position.

4. There are times when I don't even get time to scale out of my position as then market quickly moves in my favour. Also if this does not happen, I keep scaling out if price is below my entry price and time is ticking by as per my plan. Also a thing to note that, I don't wait for my SL to get hit as I am already out of my position well before my SL being hit(never let the market tell you that your position is wrong.)

So, this is what helps me to win big when I win, and lose small when is lose.

This is more of a intuitive part and it works most of the time for me.

Hope this was of some help to you.

Thanks.
Phantom.

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Phantom View Post
Hi PandaWarrior,

To start with, I am a great admirer of POP. All that he said just make sense to me and this strategy of all in/scale out is based on one of POP's sayings: "Let the market tell you your position is proven correct, but never let the market tell you that your position is wrong."

So here is how I implement it when I take any position:

1. From my past trade records, I had noticed that whenever I won, the wins were quick and price would move in my favour in not more then 5min or say 2-3 bars(I trade based on 3min charts).

2. Also, as time passes by and price does not move in my favour, the probability of me being stopped out keeps on increasing.

3. Now whenever I get my valid trade setup, I enter with my max allowable position size on that setup. Now I presume that I am on wrong side and keep scaling out until I am proven correct on that particular position.

4. There are times when I don't even get time to scale out of my position as then market quickly moves in my favour. Also if this does not happen, I keep scaling out if price is below my entry price and time is ticking by as per my plan. Also a thing to note that, I don't wait for my SL to get hit as I am already out of my position well before my SL being hit(never let the market tell you that your position is wrong.)

So, this is what helps me to win big when I win, and lose small when is lose.

This is more of a intuitive part and it works most of the time for me.

Hope this was of some help to you.

Thanks.
Phantom.

Thats exactly what i was thinking , i noticed that scaling-out when it goes wrong hasn't been discussed properly , most of the discussion is about scaling-out when taking profits , what about scaling-out when taking losses as well ? Example : Lets say i trade 3 lots Dax , and my first SL at 10 points , second SL at 20 and 3rd SL at 30 points away .

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  #93 (permalink)
 olobay 
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Here's a study.

Money Management

Basically not going all in, all out costs you profits while scaling in and out reduces drawdown and smooths the equity curve.

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  #94 (permalink)
 mabr0408 
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if I have a scale in methodology and add to my positions in thirds how would you manage the trade after the first two scales are made? Additionally, where would you begin to take profit after you are scaled in at full size? Look forward to hearing some responses....

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  #95 (permalink)
 KelvinKing 
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I mainly a scalper, so I am all in and all out....

There are some arguments against scaling in/out as well, especially when it stops you out for a break even.

Essentially making your stats seem like you risked money to make no money.

Over the years of trading experience, I find the scaling in and out strategy to be more applicable to people who are working large orders only....

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  #96 (permalink)
 baruchs 
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Scaling in/out is logically wrong.
Maybe physiologically its OK.

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  #97 (permalink)
 grausch 
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I trade longer term, but the following scenario applies to all types of trading.

A stock gaps past my intended buy point. Not very happy with that, but since I don't know whether this will be a major runner, I buy some stock. Then during the day, as it descends, I buy some more. As long as it holds the breakout point, I am comfortable adding. My stop-loss is still based below the breakout point and I don't adjust it downwards with any additional buys.

In the above example, I get a lower average cost and less risk to my account. End of the day, my probability of being stopped out is still the same as if I had put on the full trade immediately, except that I would lose slightly less if it does happen.

Depending on how you scale in could lead to bigger profits than going all in. Also, depending on how you scale out, you could also have bigger profits than just going all in. Although, I will admit that scaling in/out will most likely smooth the equity curve.

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  #98 (permalink)
 sixtyseven 
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Attached is @Big Mikes trade data (which he has given permission to repost here) that he previously posted to the forum.

Mike has a real edge, and an integral part of that is how he manages the trade by scaling in, averaging down, adding to and scaling out. He mixes it up based on his current read of the market.

In using his entry and exit points I've made some basic assumptions so I can test out the different entry / exit methods.

The assumptions are:-
- He opened a trade when he thinks he has an opportunity to make money
- He fully closed the trade when he thinks he no longer has an opportunity to make money

That last assumption is a big one. In reality Mike scales out at structural targets and when he perceives his odds of further profit are waning. Perhaps that invalidates the results. Perhaps not. I think it's safe to say he doesn't leave a trade open when the conditions on which he opened the trade are now invalid. And if they are still valid he has the opportunity to make more money.

In any case, the goal was to determine what effects entry/exist & trade management has on the outcome (based on the 2 assumptions above) - and if so, what is it.

The s/sheet is set up with various adjustable parameters - so its possible to adjust the opening size, how many points before you add, scale out or average down etc.

Regardless of starting AIAO size, # contracts added, initial scaling in size, or points in your favour before adding - both "AIAO" and "All in - Scale out" eat ass.
Averaging down - which most people curse as the devil is actually pretty darned good (unless I've ballsed up my formulas)

I ran through some Monte Carlo's using the parameters in the screen shot below to look at the distribution of returns. Te results are based on 200 trades with 5000 simulations. The more profitable methods had bigger distributions - but the downside wouldn't be enough to stop you trading those methods.

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  #99 (permalink)
 timendaGain 
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Thanks @sixtyseven for sharing that.

I’d like to be persuaded to favor the scale inscale out method as it’s promoted by many successful traders here. The study posted shows Ave Size for the various scale-in/out methods. It ranges from 8.9 to 11.5 contracts. The AIAO method uses 9 contracts to be comparable.

The problem I have is that the study doesn’t show the maximum number of contracts used for the scale-in/out methods. If you’re willing to tolerate a maximum of say, 15 contracts for scaling then your risk tolerance is 15 contracts… period. Shouldn’t the AIAO method use the maximum tolerated ?

This observation is far from academic for me. It’s the real # 1 reason I actually trade AIAO on a per “strategy” basis. I do “scale” by stacking multiple setups/strategies as opportunities for their setups present themselves. Wow, I think I answered the question for myself. My maximum is distributed across my trade setups.

Anyway, maybe the study should have the maximum listed anyway and show the results for AIAO just to complete the picture.

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  #100 (permalink)
 sixtyseven 
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@timendaGain,

I think maximum tolerated risk is a red herring, rather expectancy should be the focus. I've attached a quick spreadsheet to demonstrate why I think this.

2 different cases.
Case 1: Assumes a 'BE' stop if price goes your way, at which point you add.
Case 2: Leaving the stop where it was if price goes your way.

I've used a binomial tree to calculate the probabilities of various edge sizes and the resulting likely-hood of a full loss, full win, BE, or full loss if price first moves your way. I didn't bother running the tree all the way out - so the total probability of outcomes adds only to 99.6%

Adding - and exposing yourself to more potential risk - also exposes yourself to more potential gain. That's the nuts of it. And in reality if you possess an edge, and take on more risk it will pay off. If you don't have an edge - you will get smashed. The distribution of outcomes will be wider though, so you'll have some knarly equity swings both good and bad. But in the long run - if you possess a true edge - everything will be ok.
Obviously your total account size etc, needs to be considered when deciding on trade size, I'm not saying go crazy here. But I think it's wrong to look only at maximum total loss. Here's why....

In case 2, you occassionally get really smashed, and lose a lot more than what you do with AIAO. BUT it's only occasionally and that's the very important key - approx 15% of the time for a simple risk 5 get 10 situation. The outsized winners more than make up for it.

In case 1, if you move yourself to BE - you will have the same maximum loss - even WITH more contracts. BUT, your win % goes down, which on the surface may be troubling. This is because you will lose when price comes back to your entry point (which I've called breakeven - for the purposes of doing a direct comparison with AIAO)

I've included commissions of $5 RT.

I also added in a comparison of scaling in, and adding. So that the maximum total loss is the same is AIAO. That doesn't look pretty because you are exposing yourself to much less total risk, and therefore much less total gain. In the scenario with the parameters I previously posted the Scale-in & add method worked out quite ok - but that was because you took on more average contracts - which meant more exposure to bigger occasional losses. In this case - to keep maximum total loss at a certain amount means the majority of your losses are small, and so are your winners. With only that occasional full size loss you were happy taking with the AIAO.

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