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Do you scale out?

Do you scale out?  

69 members have voted

  1. 1. Do you scale out?

    • yes
      39
    • no
      30


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Assume you trade a 10-lot. Will you scale out? Why (not)? Is scaling based on the fear to loose once you have a profitable position? Why won't you wait untill the target is hit? Is it inferior human behaviour?

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I tend to scale out on all my trades. This is the only way for me to be able to ride out my positions on a winner on a intraday trade. I dont think I can sit tight on a 100pt YM rallly without scaling out at least a portion.

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Assume you trade a 10-lot. Will you scale out? Why (not)? Is scaling based on the fear to loose once you have a profitable position? Why won't you wait untill the target is hit? Is it inferior human behaviour?

 

I wait until my target is hit, but I have more than one. Your "target" has a certain probability of being hit (being known or unknown to you). It's amazing to watch newer traders just throw targets out there off the top of their head. There is no "one rule" for what your target(s) should be. It depends on your system/setup and risk tolerance. I take partial positions off at the higher probability targets so I can concentrate on reading the markets for the lower probability ones. For me, it's not so much about fear but more on the simple concept of capital conservation. In order to be a successful trader you MUST make money. It's very black and white (or red and green :) ). Remember, psychology is a BIG part of trading and scaling out (depending on your system of course) can help a lot in certain situations.

 

Just like picking your targets for all in and all out...you can pick wrong scale-out areas that WILL lower your PnL some. It's easy to look back and say "if only I didn't scale out". However, if you didn't scale out and take a small win on that trade would you have had the ability to jump right back in for that next trade? It's a big mind game and visually backtesting your PnL can give you false perceptions.

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I don't scale out. Psychologically this technique can be comfortable for some traders ("I secured some profit and now can go for a home run with the rest of contracts") and uncomfortable for others ("Why did I cut my size down, I would have earned so much more"). Mathematically, for lack of anything effective coming from my own research, I would opt for Tharp's standpoint which is "full position from start to finish, otherwise you cut your profits short". It is so much simpler... But there are top traders who do scale out so I quess they do not do that for psychic comfort only...

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I wait until my target is hit, but I have more than one. Your "target" has a certain probability of being hit (being known or unknown to you). It's amazing to watch newer traders just throw targets out there off the top of their head. There is no "one rule" for what your target(s) should be. It depends on your system/setup and risk tolerance. I take partial positions off at the higher probability targets so I can concentrate on reading the markets for the lower probability ones. For me, it's not so much about fear but more on the simple concept of capital conservation. In order to be a successful trader you MUST make money. It's very black and white (or red and green :) ). Remember, psychology is a BIG part of trading and scaling out (depending on your system of course) can help a lot in certain situations.

 

Just like picking your targets for all in and all out...you can pick wrong scale-out areas that WILL lower your PnL some. It's easy to look back and say "if only I didn't scale out". However, if you didn't scale out and take a small win on that trade would you have had the ability to jump right back in for that next trade? It's a big mind game and visually backtesting your PnL can give you false perceptions.

 

This is a very good post from the "psych" aspect. True in all regards.

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Scaling out has no Y or N answer.

It is system dependent.

Some types of systems beg to be scaled out of...

Some types of systems it's downright stupid...

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Not unless my psychology demands it. I find profitable trades to be more stressful than losing or stagnant ones. Probably because in those cases, I'm in control... I know exactly what I'm going to do. In a winning trade, you are completely at the mercy of the market. If I find the stress of a winning trade too great, I may scale out. It's purely to satisfy my psyche though and has no merit based on fact or research. Logically, if it is good to take a partial exit, then it is better to completely exit. Conversely, if it is a good thing to let part of a position run, then it is better to let it all run. IMO, in a scaling out strategy, you are always risking 100% of your position size, but only letting a portion of it run in a profit. This violates the golden rule. To me, it would only be logical if your methodology also calls for scaling out of losing positions also.

Personally, my strategy uses a tightening stop. I reduce my trailing stop based upon how many ATRs of profit I have. A parabolic works well also. This way, my psyche is calmed by knowing that I'll be giving back less and less of my profits as the trade runs.

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Here's how I look at it as a discretionary trader. I try to view trading as a game of probabilities. For example, if you're long in an uptrend and volume starts to decrease, the odds of continuation have lessened, it doesn't mean that the up move is over, so I will take some longs off the table since the risk has increased. Now, let's say the move continues up, and the profile starts to fatten out, the odds have further decreased for continuation, and at this point, I will probably take off the balance of my position. I don't care if it continues up or not because the risk of staying long has substantially increased. Or let's say that the trader is long in an uptrend and volume is increasing and the profile remains elongated, I don't see any reason to scale out some simply because it has reached a pre-defined level. The odds for continuation are still good. There are times when it makes sense to me to simply get out of a trade all at once. For example, you're long because you anticipated a short covering rally which occurs, then a huge up bar occurs on very high volume, indicating that the last of the short, weak hands have covered. At that time, i would just get out completely. The odds are extremely high of the market settling back a bit, at least.

 

I guess what I'm saying is that it depends on the market conditions. I don't think that a trader should exit all their trades the same way all the time, i.e. "scale out" or be "all out" all of the time. Generally speaking, I think one needs to be more flexible when trading the markets, meaning that a trader needs to adjust their position as the market unfolds to keep risk in check. But I know that traders like to have exact rules that they can follow all the time, I just don't think the market works that way. Again, I'm talking from the perspective of a discretionary trader.

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I personally do not. Of course one cannot say scaling or all in/out is better because it depends on the scales.

 

However I will say that I think a beginner should focus on the entry and the exit. To me, that is challenging enough. If those are taken care of properly, scaling in/out will be a natural progression and matter of preference. I don't think scaling or not scaling should make or break your trading, and I think a lot of beginners assume it does. IMO scaling/trade management should be seen as the fine tuning of a plan that is already anchored solidly in the basics. I think worrying too much about it the beginning is like an aspiring baseball player worrying about who his agent is going to be. Get the basics dialed in and then worried about the good problems: e.g. profit management.

 

I do think the vast majority of scaling is inferior behavior because it is assumed that it will make or break your trading. I think that most people scale out because they are afraid of what they may feel like if they watch the +20 go to BE. That IS inferior. Having said that, many are so skilled that they scale out of losing positions and hold on to the winners. I suppose it all depends on how good you are. I don't scale, because I'm just trying to get my entries and exits right every time. That is enough to worry about, let alone adding 4 more exit points.

 

:2c:

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I usually tend to scale out, it is a habit i developed when i was pushing much larger size focused on one stock, where could not actually dump the whole position at once. I just find that psychologically this allows me to feel like i got the maximum out of a position, if it continues to go in my favour an i have a trailing stop loss chasing it up. With that being said my entire system was developed based on profit targets of "X" percent, and i would be willing to bet that when i scale out im probably only right about half the time since i have not backtested my exits as much.

 

There are proponents of both sides, and i think like with most things in trading it is alll about finding your own niche.

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I decided to test a 2 contract method of scaling on euroFX. I would take half at the very 1st resistance level. This might be anywhere from 4-20 ticks. My stop was never more than 12 ticks. I found this gave me a HUGE edge psychologically. Many times the trade became risk free, and I could hold onto it without a care waiting for target 2...

 

That said, the problem is when you are wrong and you have the same stop on both contracts. Since your loser is not averaged, it stinks because you know you will be averaging your next winner... This made me start thinking about averaging my entry. But how complicated this could all get!

 

Basically, I decided there were 3 outcomes on the two parts based on a system with a 50% win/loss ratio, 2 contracts with 2 hard stops in the same place, and two targets, one near and one further.

 

lose-lose

win-lose

win-win.

 

If this happens evenly (each scenario 1/3 of the time) and your averag win-lose trade averages to a BE, it means you are still at a 50% win/loss ratio, versus a no scale system like:

 

lose-lose

win-win

 

Now, let's say your return to risk is 2:1 average, and you risk $200 33 times. No scale:

 

lose-lose -$3300 (33/2x200)

win-win +$6600 (33/2x200x2)

 

vs scale:

 

lose-lose - $2200 (33/3x200)

win-lose - $0 (33/3xBE)

win-win + $4400 (33/3x200x2)

 

This is a very simple way of looking at scaling. In this case, scaling hurts your p/l on paper. However, because I only lost on 33% of the trades, rather than 50%, I felt very confident trading, and never hesitated to take my setup, like I might trading all in all out. I felt that my PERFORMANCE AS A TRADER benefited a lot. I experienced much greater confidence. So, though my math suggests my profits went down by 33%, I would say it's not true. Your ability to stay in the game is paramount, and scaling might just be the psychological edge you require to hang in there.

 

In short, I found it lowered my AVERAGE winner versus loser, but increased my win rate, which was good for me psychologically. It just feels good taking profits. Yes, I would regret, also, that I took them, if I had a big winner. But that is an emotional issue that must be conquered. Fear and Greed.

 

The thing I didn't like about the approach, is on a string of lose-lose, it feels bad, because your lose-lose is not averaged, while your win-win is. One day, when I was behind, I would start to break my small partial rule reasoning 'I have to get two big wins to cancel the loser-losers.

 

That day I lost a lot, and would have lost LESS if I had stuck to my plan to take a quick partial!... Also, that day made me start thinking about a daily loss limit, and a losing trade limit - things I hadn't thought about during the first two weeks of testing.

 

Ah... the lessons of trading never seem to end.

 

legout

Edited by legout

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