Scaling in and/or out - futures io
futures io



Scaling in and/or out


Discussion in Psychology and Money Management

Updated
      Top Posters
    1. looks_one Tymbeline with 2 posts (2 thanks)
    2. looks_two SMCJB with 1 posts (5 thanks)
    3. looks_3 SomePsychoDude with 1 posts (0 thanks)
    4. looks_4 deaddog with 1 posts (2 thanks)
      Best Posters
    1. looks_one SMCJB with 5 thanks per post
    2. looks_two deaddog with 2 thanks per post
    3. looks_3 Tymbeline with 1 thanks per post
    4. looks_4 doyalalexander with 1 thanks per post
    1. trending_up 448 views
    2. thumb_up 11 thanks given
    3. group 7 followers
    1. forum 6 posts
    2. attach_file 0 attachments




Welcome to futures io: the largest futures trading community on the planet, with well over 150,000 members
  • Genuine reviews from real traders, not fake reviews from stealth vendors
  • Quality education from leading professional traders
  • We are a friendly, helpful, and positive community
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts
  • We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

(If you already have an account, login at the top of the page)

 
Search this Thread
 

Scaling in and/or out

(login for full post details)
  #1 (permalink)
 ursus 
Sydney NSW Australia
 
Experience: Intermediate
Platform: TradeStation, Oanda
Trading: Forex, index futures
 
ursus's Avatar
 
Posts: 76 since Jun 2020
Thanks: 5 given, 79 received

Scaling in, in creasing the position as it gets more profitable. Scaling out, taking partial profits as the position is making profits. There are probably more proponents of scaling out, but enough defenders of the former to wonder.

What are the thoughts of the brethren? Do you guys scale in or scale out? Or fixed position per trade?

Started this thread Reply With Quote
The following user says Thank You to ursus for this post:

Can you help answer these questions
from other members on futures io?
TradingView like VOLUME indi for Ninja8 ?!?!
NinjaTrader
Realtest vs Amibroker
Platforms and Indicators
Effect of Bitcoin price on Altcoins
Crypto Futures
convert sierra chart graph to Ninja traders 8
NinjaTrader
What are people who makes their living off of applying s …
Traders Hideout
 
 
(login for full post details)
  #2 (permalink)
 doyalalexander 
Dallas tx
 
Experience: Intermediate
Platform: Thinkorswin
Trading: Es
 
Posts: 30 since Oct 2014
Thanks: 7 given, 43 received

My thoughts... When I am looking for a position to hold over time, I like to scale into trades on pullbacks and increasing my average price. Over a longer period I am expecting some ebb and flow. But for shorter trades, especially intraday, I prefer to enter and scale out to lock in profit and breakeven quicker.

Reply With Quote
The following user says Thank You to doyalalexander for this post:
 
(login for full post details)
  #3 (permalink)
 SMCJB 
Legendary Market Wizard
Houston, TX
 
Experience: Advanced
Platform: TT and Stellar
Broker: Primary Advantage Futures. Also ED&F and Tradestation
Trading: Primarily Energy but also a little GE, SI, Bitcoin & Ether
 
Posts: 4,661 since Dec 2013
Thanks: 3,981 given, 9,340 received


My thoughts...


SMCJB View Post
Why you should add to winners and never add to losers

I recently got an email from Kevin Davey of KJ Trading, aka @kevinkdog, regarding his latest blog post entitled “Peel Off Trading”. Kevin is a highly respected member of futures.io (formerly BMT) who has done several webinars, has his own “ Ask me Anything Thread", has written a book “ Building Winning Algorithmic Trading Systems, A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading” and is also I believe the current coordinator of “ The Battle of the Bots".

The basic concept of “Peel off Trading” is
In its simplest form, the trader starts out with 2 contracts, exits the first at a small profit (the “peel off”), and then holds the second as a “runner,” going for big profits. In some cases when the first contract is exited, the second contract is then modified to have a breakeven stop.
Like almost all of Kevin’s work it’s a very interesting piece based upon supporting analysis. Kevin actually back tests the exit rules upon three different strategies but the results are inclusive
Results of the out-of-sample analysis are mixed. The ES is the same, the GC strategy is better with the “peel off” method, and the JY strategy is better with the baseline (always trading 2 contracts).
While reading it I was actually reminded of a different blogpost “ Does Averaging in Work?” by Ernie Chan. While I don’t believe Ernie posts here he has done several webinars. He has also written two books “ Quantitative Trading: How to Build Your Own Algorithmic Trading Business” and “ Algorithmic Trading: Winning Strategies and Their Rationale”.

While Kevin’s blog was looking at exit scenario’s, Ernie’s blog was looking at entry rules. It was also more theoretical in nature, but his conclusion was more decisive.
Ron Schoenberg and Al Corwin recently did some interesting research on the trading technique of "averaging-in". For e.g.: Let's say you have $4 to invest. If a future's price recently drops to $2, though you expect it to eventually revert to $3. Should you
A) buy 1 contract at $2, and wait for the price to possibly drop to $1 and then buy 2 more contracts (i.e. averaging-in); or
B) buy 2 contracts at $2 each; or
C) wait to possibly buy 4 contracts at $1 each?
Let's assume that the probability of the price dropping to $1 once you have reached $2 is p. It is easy to see that the average profits of the 3 options are the following:
A) p*(1*$1+2*$2) + (1-p)*(1*$1)=1+4p;
B) 2; and
C) p4*$2=8p.
Profit A is lower than C when p > 1/4, and profit A is lower than profit C when p > 1/4. Hence, whatever p is, either option B or C is more profitable than averaging in, and thus averaging-in can never be optimal.
As I started thinking about Chan’s analysis I didn’t like the way he considered the one situation “that the probability of the price dropping to $1 once you have reached $2 is p” and excluded other scenario’s. In a moment of boredom I decided to expand Chan’s analysis to a binomial tree where we have a probability p of going down $1, but also a probability (1-p) of going up $1.

Hence at time T+1 we have probability p of trading $1, and a probability (1-p) of trading $3. Then at time T+2 we have probability p*p of trading $0, a probability 2p(1-p) of trading $2 and a probability of (1-p)*(1-p) of trading $4.

For those of you were not aware this is what we would call a binomial tree which is used to derive the Binomial Distribution ( Wikipedia, Wolfram Mathworld) and there are many option and derivative pricing models based upon binomial trees and even more based upon other type of trees.

If we consider as an example scenario A) where we buy 1 contract at $2, and wait for the price to possibly drop to $1 and then buy 2 more contracts.
In case i) where the market goes up at T+1, and T+2 to $4 we never buy the additional contracts, hence we buy a single contract at $2, that has a $2 profit. Since this has a probability of (1-p)*(1-p) the expected payout of case i) is 2*(1-p)*(1-p)

Case ii) the market goes up at T+1, and then down at T+2 to $2 we never buy the additional contracts, and we have no profit. Hence the expected payout of case ii) is 0.

Case iii) the market drops at T+1, and then rallies back to $2 at T+2. In that case our initial contract purchased at $2 is breakeven, but when prices dropped to $1 at T+1 we added two more contracts. These two contracts now have a total profit of $2. Hence the expected payout of case iii) is 2*p*(1-p).

Finally in case iv) the prices drops at T+1 and T+2 and ends at $0. In this case we lose $2 on our initial one contract purchase and lose an additional $2 on our two extra purchases at $1. Hence we have a total loss of $4 and an expected payout of -4*p*p
Adding this all together our expected payout for scenario A is
2*(1-p)*(1-p) + 0 + 2*p*(1-p) - 4*p*p = -4p^2 -2p +2
It follows that the other expected payouts are B (-8p +4) and C (-8p^2 +4p)

If we plot these functions we can see that while A) and C) might outperform B) (well actually lose less) when p>0.5 (ie market is more likely to go down) but they underperform even more when p<0.5 and hence the expected returns of A) and C) are both negatively skewed in relation to B).


While this doesn’t completely agree with Chan’s analysis that’s it’s never better to scale in, it does support his analysis in that from a risk reward perspective it’s never better to scale down into a position.
I then added a fourth scenario D) where we Buy 1 at $2, and if prices go up we buy 2/3rds more at $3. I know fractions make it messy but it’s the only way to keep it an equal investment size.
The expected payout of D) is +1.33p^2 - 6p +2.67

This is the complete opposite of A) and C). It underperforms 2) when p>0.5 but outperforms by a greater margin when p<0.5, hence it has a positive expectancy skew!

This would imply that not only should you not “average down” but that adding to winning positions has a better risk reward.



While D has the best risk/reward it does have a lower reward than the base scenario B). Hence to achieve the same desired results, you can/should scale the positions appropriately. This is actually a great way to visualize what we are discussing as you can see below. You will see that while 3 of the 4 have similar positive profiles, scenario D has the least worse profile when the market goes against the position.



I then expanded the analysis significantly, going out to T+5, and including additional scale in scenarios. The conclusions were the same though. Averaging down has a worse risk reward profile than buying your entire position at entry, while adding to winners has a better risk reward profile.

Disclaimers/Notes/Flaws/Weaknesses:
A couple of the obvious flaws of this analysis are
- it uses a fixed price movement of $1 as opposed to a percentage move - while this is actually easy to fix for the purposes of this example it would add undue complication since +1-1=-1+2 but +1%-1%<>-1%+1%
- it assumes a binomial distribution when in reality a log normal distribution would be a better fit.
- Price (changes) in reality are not log normally distributed. As we all know tails are a lot lot fatter.
- Stops could potentially completely change the analysis.


Reply With Quote
The following 5 users say Thank You to SMCJB for this post:
 
(login for full post details)
  #4 (permalink)
 deaddog 
Prince George BC Canada
 
Experience: Advanced
Platform: BMO / Questrade
Broker: BMO / Questrade
Trading: Stocks
 
deaddog's Avatar
 
Posts: 977 since May 2013
Thanks: 152 given, 2,990 received

I swing trade equities
I both scale in and out.
I never average down. I enter with a partial position which keeps the risk low and add to the position as the trade moves in my direction.
I exit on a trend line break. (depends on price action) I'll exit 1/2 the position on a trend line break or even possibly sell into strenght on a parabolic move. Take off 1/2 again on a break of a ma and the rest on a break of a higher ma.
This allows me to keeps my losses small and let my winners run. (in theory at least)

"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
Reply With Quote
The following 2 users say Thank You to deaddog for this post:
 
(login for full post details)
  #5 (permalink)
 Tymbeline 
Market Wizard
Leeds UK
 
Experience: Intermediate
Platform: TradingView
Broker: LCG, Oanda
Trading: ES, 6E, Cable
 
Tymbeline's Avatar
 
Posts: 535 since Apr 2015
Thanks: 1,722 given, 803 received

I've never "averaged-in"/"averaged-down".

I like adding to winning positions (when I can do so without increasing the risk beyond what it was when I opened the original position) if the "entry criteria" are still at least as valid for me to "add" as they were for me to "open" - and sometimes they are, because my trading tends to be trend-following.

I tend not to scale out, but to "close fully" when I no longer want to be in the trade.

Long ago, trading spot forex, I used to trade 3 lots, closing the first two at whatever profit-level would “cover the cost of the third” and ensure not losing on the overall trade, whatever happened, hoping to catch occasional runners with the remaining lot. I’m not at all convinced, now, that it was the right thing to do.

Reply With Quote
The following user says Thank You to Tymbeline for this post:
 
(login for full post details)
  #6 (permalink)
 Tymbeline 
Market Wizard
Leeds UK
 
Experience: Intermediate
Platform: TradingView
Broker: LCG, Oanda
Trading: ES, 6E, Cable
 
Tymbeline's Avatar
 
Posts: 535 since Apr 2015
Thanks: 1,722 given, 803 received

It's now too late to edit my post above, but I forgot to mention that Tharp, Chande and other authors make the hard-to-contest point very well and clearly in their various books that "all in" at the start, combined with scaling out, if you compare it with the alternative of adding to winning positions (i.e. scaling in as well), is in effect a way of maximizing your position-size when your odds are least favourable.

Reply With Quote
The following user says Thank You to Tymbeline for this post:
 
(login for full post details)
  #7 (permalink)
 SomePsychoDude 
Genova.Italy
 
Experience: Beginner
Platform: TradingView/MT4
Broker: roboforex/admiralmarkets
Trading: DAX
 
SomePsychoDude's Avatar
 
Posts: 217 since Mar 2021
Thanks: 135 given, 111 received

For me, it's all in + all out at once, simple as a mammoth shit
0 psychological pressure that way

From a math perspective, it only makes sense to add to existing positions (the profitable ones) and never scale out. But that does not matter.
The most important thing is that you need to feel yourself with almost no psychological pressure, no matter the style of execution.

Try for a week in that way, another week in another way and the market will tell you what is yours.

Reply With Quote


futures io Trading Community Psychology and Money Management > Scaling in and/or out


Last Updated on September 17, 2022


Upcoming Webinars and Events
 

NinjaTrader Indicator Challenge!

Ongoing
     



Copyright © 2022 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, Ph: +507 833-9432 (Panama and Intl), +1 888-312-3001 (USA and Canada), info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts