BSD All In-All Out and Scaling Trades Discussion

[TheNegotiator 13]

I felt a new thread for this topic is warranted. If not for interest and enlightenment, for pure argument!(don't get too carried away though lol)

 

Anyway, here is an article which I feel sums my thoughts up on scaling out of positions very well indeed:-

 

Scaling Article

(btw it's just a random web article I found a while back)

 

I'd like to point out that each individual is different and each strategy is different. If you have a strategy which either hits its target or stops out mostly, you might want to simply hit full size with no scaling at all. On the other hand, if like many you see some degree of MFE even on the majority of stop out trades, it may be worth your while looking at scaling out. Imo, while it may well reduce your profit for winners, it will also reduce your losers(and take a small profit from otherwise losing trades). Trading is about the sum of all parts. It is my opinion therefore that a more stable equity curve is desirable as you can then build your account better through position sizing.

 

Anyway, read the article and see what you make of it.

[jurotraderslab 10]

It's about the same as what I found out based on my extensive backtests. Scaling out all at once in general is the best you can do in terms of overall profitability but the equity curve may not be as smooth as let's say scaling out for partial profit (or setting stops to break even, etc.). This, however, is only true for 'general' strategies, there are specific situations where it is better to do something else (anyone has a momentum based strategy?). Needless to say, and that is the main point of the article, the psychological aspect of scaling out is attractive and most discretionary traders employ it in some way but I would argue that for an automated system, it's more attractive (simpler programming) to just get out all at once...

[TheNegotiator 13]

Maybe, but if your goal as a automated trader is to trade opm, the drawdown is perhaps going to be a key factor.

[MightyMouse 12]

Great topic!

 

I mainly day trade and I add to my position when the trade is showing a profit and I scale out of contracts when the trade moves against my entry. As I add, the average price of my entry rises ( of falls if short) which means that I am constantly moving my break even point closer to the current price. It also means that mental pressure begins to build since the vertical distance between a really nice profit and break even remains small. As an example, if I begin with 2 contracts in CL , say long at 100, by the time price reaches 101.01 I have added 5 contracts for a total of 7 and my BE is around 100.60 and the profit on the trade is about $2900. You need a to develop a lot of confidence in your ability to read the current market conditions. Many, many times I end up turning a decent winner into a breakeven trad, but there are enough times when I can turn a $200 risk into 3-4k or more of profit.

 

 

Other trades I am all in or all out.

 

I am negative on scaling out because when your trade does become profitable, you only have a small position on and when you get stopped out, your position is larger if you don't scale out of the loser. It goes completely against the grain of maximizing winners and minimizing losses.

 

In addition, as price moves in your favor, your scale outs put pressure on your own position. So, if you are long, and you scale out, you are selling against your position. This doesn't make sense to me. If I am long, I want to protect my position from sellers and if it were possible, I would use a bat to keep sellers away, not join them in putting pressure on my position. If you think that your small scale out doesn't amount to selling pressure, you really need to reconsider how the market works. When you do scale and price continues higher ( in a long trade), then scaling out was exactly what you should not have done since the pressure you added to your position plus the pressure from the other sellers is not enough to stop price from going higher. In other words, sellers are losing and are now getting stopped out and you have a smaller position on because you scaled out. You should not pat yourself on the back for this.

 

If you need to back test this for it to make sense to you, you are in the wrong business.

[BlueHorseshoe 10]

 

I've been attempting a discussion on this topic in another thread ("quit job to watch DOM") the past few days, in response to a Tim Racette post recommending scaling out. Reproduced below is my latest post in that thread - I hope it's of some interest here . . .

 

I thought it was about time that I did what I’m asking others to do, and put forward some actual figures to support my claims about the inadequacies of profitable scale-out strategies. So here are the results of testing a simple stop-and-reverse day-trading system, with various dollar profit exit methods.

 

The system sells when a 3 period moving average crosses above a 30 period moving average, and buys when a 3 period moving average crosses below a 30 period moving average (ie it ‘fades’ the MA crossover). It always trades 2 contracts, and it always uses a 4 point per contract stop-loss. The back-tests all use the @ES e-mini futures contract over a 5 year period. 30 minute bars were used. No commission or slippage has been deducted.

 

IMPORTANT: The profitability of this system is almost entirely due to the fact that the MA length parameters have been heavily optimised. It is used here as an example. Unless you want your broker to fall in love with you, please do not attempt to use it in live trading or you will most likely lose money. In the 4 months following the back-test period this system has consistently lost money.

 

Here is the performance when we scale out of one contract for a 2 point profit, and the other for a 4 point profit:

 

Total Net Profit: $60,925

Profit Factor: 1.17

Percentage Profitable: 58.7%

 

If anyone wants to see equity curves etc then let me know and I will upload them.

 

Next are the results of scaling out of the first contract for a 4 point profit, and the second contract for a 6 point profit:

 

Total Net Profit: $79,812

Profit Factor: 1.16

Percentage Profitable: 57.93%

 

Finally, we have the results of simply exiting both contracts for a 4 point profit – in other words, not scaling out at all:

 

Total Net Profit: $166,800

Profit Factor: 1.23

Percentage Profitable: 65.48%

 

I would like to point out that the ‘un-scaled’ 4 points per contract profit target is not the optimum target (this would have been 7 points per contract, which goes some way to explaining why the 6 point late scale-out fared better than the 2 point early scale out).

 

This is why I think Tim Racette's advice in this thread to scale out is poor - I believe that you will find that what you see above repeats itself in pretty similar form for any strategy. And before anybody starts quoting Karl Popper’s falsification principle at me, I am fully aware that I can produce dozens of examples to support my argument, but that it only takes one counter example to discredit it. . .

[BlueHorseshoe 10]

So, if you are long, and you scale out, you are selling against your position. This doesn't make sense to me. If I am long, I want to protect my position from sellers and if it were possible, I would use a bat to keep sellers away, not join them in putting pressure on my position. If you think that your small scale out doesn't amount to selling pressure, you really need to reconsider how the market works.

 

Surely this depends on your beliefs about the auction process? In the example above, I would suggest that the thing that may move the position against you is not increased 'selling pressure', but lack of buying interest. In fact, if you were to place a large sell order, then there is a strong chance that the market will gravitate upwards to try and fill it, benefiting your original long position.

 

Even if we assume the market perspective that you discuss, surely you'd have to be trading a rather large number of contracts to have any significant impact on any liquid market?

 

Look forward to hearing your thoughts on all this . . .

[BlueHorseshoe 10]

Maybe, but if your goal as a automated trader is to trade opm, the drawdown is perhaps going to be a key factor.

 

I haven't thought this point through in any great depth yet, but wondered about the following:

 

If System A trades 10 contracts and gives a yearly net return of 100K without scaling, producing a 50% drawdown, and System B trades 10 contracts and gives a yearly net return of 50K with scaling, producing a 25% drawdown . . . Then surely the trader of OPM could simply use System A but only trade 5 contracts, thereby generating a 50K return with 25% drawdown?

 

Of course, I'm talking in terms of invented figures here . . .

[TheNegotiator 13]

I think that the idea of scaling into or out of a position and the merit of doing so will not only vary with live trading results, but with many different other factors too. I would say that discretionary vs automated would be the major one, then personality and then method type. With the latter for example, if you trade based off reference levels many times you will see a rebound of a number of prices depending on the market. If you are always wanting to take the entire position off at once, it is far more difficult to then exit the trade that then doubles back in the original direction. You then take a full sized loss on the position.

 

The other thing I'd point out is that (certain products more than others) markets tend to have a back and forth "spiralling" within overall moves. If you are entering based on levels, you can be onside within the "spiral"(crap term-can't think of a better one right now!) before the market displays behaviour which can be considered as reversal type behaviour. If you are more bothered by bigger moves and therefore the change over specific price to gauge your entry, then your idea of this is going to be different.

 

As the article points out in different terms, it's really "horses for courses"

[MightyMouse 12]

Surely this depends on your beliefs about the auction process? In the example above, I would suggest that the thing that may move the position against you is not increased 'selling pressure', but lack of buying interest. In fact, if you were to place a large sell order, then there is a strong chance that the market will gravitate upwards to try and fill it, benefiting your original long position.

 

Even if we assume the market perspective that you discuss, surely you'd have to be trading a rather large number of contracts to have any significant impact on any liquid market?

 

Look forward to hearing your thoughts on all this . . .

 

When a large sell order is entered the first thing that happens is price retreats to try to see if the seller is weak enough to be willing to sell lower. Bids disappear. Price will not go higher when a large sell order enters. That really doesn't make sense in any auction. If you add your sell order, you are exacerbating the situation. Even if it is with only one contract. Likewise when a large buy order enters. The market wants to see if they can make the holder buy higher. Once the sell order is complete, then price will rise to see if they were weak shorts or not.

 

When the sell order was that of a weak long exiting early, then there will be no further buying to push price higher from the sell order because the weak long exiting will not create stops the way a short order would.

 

It is a huge misconception that your small size doesn't matter. It could be the case that your size gets run over by large orders. But keep in mind that when you are scaling out, others are doing exactly the same thing at exactly the same time, so your small order and their small orders add up to a lot of contracts. It is actually one of my favorite trades to trade into that type of activity, when some of them get stubborn.

 

The only time your trade does not matter is if you are in simulation mode or when you are backtesting. You can't back test live trades, because you can't enter live in the past.

[zdo 20]

I tire of going all broken record but, I thankfully believe at some evolutionary point, traders/posters in here on TL will finally realize re scaling:

It’s system specific!

To eyefeel, brainfeel or stat. rigorously 'test' a system (or even the range of parameters of a system), then generalize to all systems from that the merits of scaling (or not) in, as Kane phrases it, a “definitive, clear-cut, or irrefutable” way is ________, ________, ________ , and _______________ (you fill in the blanks. hint: the words or phrases for the blanks are all ‘wise’ – NOT!)

Yet, if there’s one, there’s hundreds if not thousands of sincere posts that do just that kind of ‘blanketing’ – and it’s even worse on the other trading forums of this scale… I hope you can imagine my agonized screams !

 

Negoc8r, this is a great article! Thanks for sharing it.

Reason: It introduces the concept of running multiple concurrent systems and scaling out (and in, btw) within the systems where it is appropriate and advantageous and within a range of options instead of to a fixed procedure.

Built out, this concept develops to dynamic weighting to determine sizing for each member system and dynamic scaling in and out on the component systems where it helps with overall performance.

 

btw … getting to that place operationally was pure hell for me...and… the worst in training is the best one can ever expect in real performance.

Is it easy to adapt one’s brains to run multiple systems concurrently? No.

Is it easy to adapt one’s brains to running systems that are incompatible to self - which at least always half are? No.

Is it easy to move from the ‘blue' thinking level to the level of the ‘whole’? No.

Is it easy to overcome resistance to ‘re-balancing’ adaptations from the prior cycle of training and make new adaptations? No.

… to make the physiological adaptations that must come after the neurological adaptations? No.

Is it easy to find or create the correct compensations for each of these 'excesses'? No.

 

…Yet, from what I have seen in myself and others, this pure hell phase is the only way most of us can ever move into and consistently stay in the top 3% of traders!!!! Paraphrasing my flow coach: God comforts the disturbed and disturbs the comfortable….if you are comfortable, you are probably making the easy, but long term, incorrect choices.

 

I'm going to pull up my shorts from yesterday and get out of here.

Have a great weekend all.

Edited January 27, 2012 by zdo

[BlueHorseshoe 10]

When a large sell order is entered the first thing that happens is price retreats to try to see if the seller is weak enough to be willing to sell lower. Bids disappear. Price will not go higher when a large sell order enters. That really doesn't make sense in any auction.

 

 

Hi MightyMouse,

 

I don't trade intraday and almost certainly haven't spent as much time as you or many others on this forum studying price action or watching depth of market info. So I'm pretty much 'on the fence' with this, but I think there are people who would disagree with you, and I don't think it would be true to say that their arguments don't make sense.

 

If you take the stance that a liquid market exists to efficiently facilitate trade, then you would expect it to gravitate to the price levels where the most trade would occur. I'm sure you've read countless times about floor traders supposedly moving the market to areas where they know a confluence of stop orders are placed, such as the prior day's high/low, in order to trigger these. Do you not think that the market behaves like this anyway to some degree, without the deliberate manipulation of the floor traders?

 

On a similar note, can I ask, would you consider a support level to be an area where many buyers are willing to step in (or a few buyers bidding for many contracts), or an area there is little interest or price agreement from market participants (ie something like the opposite of 'fair value')?

 

Finally, can I ask how you reached the undertanding you described (ie is it the result of observation, testing, other people's theories, etc)?

 

Look forward to hearing your response.

[BlueHorseshoe 10]

I tire of going all broken record but, I thankfully believe at some evolutionary point, traders/posters in here on TL will finally realize re scaling:

It’s system specific!

To eyefeel, brainfeel or stat. rigorously 'test' a system (or even the range of parameters of a system), then generalize to all systems from that the merits of scaling (or not) in, as Kane phrases it, a “definitive, clear-cut, or irrefutable” way.

 

Hopefully I made it clear in my post (the final para) that I wasn't doing this, and that I was fully aware that I was citing a specific example of a backtested system, and the limitations of doing so. The 'generalisation' comes not from that specific example, but from the fact that it is typical of the same tendency in the many hundreds of systems that I have examined.

 

You say the profitability of scaling out is 'system specific' - but to what system is it specific!?!?

 

Despite several days of pressing this question across two different threads, and receiving responses such as the one above, not one single person has responded by giving a concrete example of where the scaling out of profitable trades actually works.

[MightyMouse 12]

Hi MightyMouse,

 

I don't trade intraday and almost certainly haven't spent as much time as you or many others on this forum studying price action or watching depth of market info. So I'm pretty much 'on the fence' with this, but I think there are people who would disagree with you, and I don't think it would be true to say that their arguments don't make sense.

 

If you take the stance that a liquid market exists to efficiently facilitate trade, then you would expect it to gravitate to the price levels where the most trade would occur. I'm sure you've read countless times about floor traders supposedly moving the market to areas where they know a confluence of stop orders are placed, such as the prior day's high/low, in order to trigger these. Do you not think that the market behaves like this anyway to some degree, without the deliberate manipulation of the floor traders?

 

On a similar note, can I ask, would you consider a support level to be an area where many buyers are willing to step in (or a few buyers bidding for many contracts), or an area there is little interest or price agreement from market participants (ie something like the opposite of 'fair value')?

 

Finally, can I ask how you reached the understanding you described (ie is it the result of observation, testing, other people's theories, etc)?

 

Look forward to hearing your response.

 

I described what would occur if a sell order was entered as a limit order. The description I gave was very short. It would take pages to detail the mechanics of why such happens.

 

When a sell order is entered at market, the next direction the market takes is generally up, so there is a difference. You may be thinking of this type of order. Again, it would take pages to detail why.

 

At areas that appear to be support, I try to identify the quality of the the positions that are getting long. If they appear to me to be weak, then I will short into support if the direction has turned lower on a relatively small time scale. Weak longs will have stops very few ticks away and they will also begin to scale out right away with very little positive movement. There is no metric for this, it is a visually perceived by watching the DOM and T&S. Other sellers will see this as well and put pressure on buyers to cough up their positions at lower prices. If the quality of the buyers is not weak and there are weak sellers present and the direction is positive, I will enter long at an area that appears to be support. If you watch long enough, it starts to make sense.

 

As far as trade facilitation etc, I believe the markets move in the path of least resistance. In the case of an up market, that could mean a lot of strong buyers and a lack of strong sellers. Or it could mean a lot of weak sellers and no weak buyers or weaker sellers than weak buyers, etc. I totally agree that lots of stops are at various chart milestones such highs and lows, etc. I frequently exit my positions just above or below those points if I have evidence that that is where the market was trying to go.

[xtraCache 10]

Interesting topic, thanks for starting it..

 

A discretionary approach to scaling both in and out appeals most to me as I find so much of trading is about adapting to the current market activity.

 

Maybe this guy's 'reasoning' for entering/management/exiting trades could be of value.

SimpleAndHard's Channel - YouTube

his trades this day were huge (see the 'more info' text):

SimpleAndHard's Channel - YouTube

 

Cheers

 

 

Scaling Article

(btw it's just a random web article I found a while back)

 

I'd like to point out that each individual is different and each strategy is different. If you have a strategy which either hits its target or stops out mostly, you might want to simply hit full size with no scaling at all. On the other hand, if like many you see some degree of MFE even on the majority of stop out trades, it may be worth your while looking at scaling out. Imo, while it may well reduce your profit for winners, it will also reduce your losers(and take a small profit from otherwise losing trades). Trading is about the sum of all parts. It is my opinion therefore that a more stable equity curve is desirable as you can then build your account better through position sizing.

 

Anyway, read the article and see what you make of it.

[zdo 20]

BlueHorseshoe

 

btw, I wasn’t singling out your’s or any other single post about It’s system specific!. If anything I was ‘singling out’ TL as the site that needs to move on from the responses so typically given in forums... to me it's better not to discuss it at all than it is too generalize about it based on unacknowledged individual 'emotional' predilections, etc...

 

re: “Hopefully I made it clear in my post (the final para) that I wasn't doing this, and that I was fully aware that I was citing a specific example of a backtested system, and the limitations of doing so. The 'generalisation' comes not from that specific example, but from the fact that it is typical of the same tendency in the many hundreds of systems that I have examined.

 

You say the profitability of scaling out is 'system specific' - but to what system is it specific!?!?

 

Despite several days of pressing this question across two different threads, and receiving responses such as the one above, not one single person has responded by giving a concrete example of where the scaling out of profitable trades actually works.”

 

Fair point...

 

One example of an ‘excursion’ setup that I can quickly explain where scaling out has worked well for me is in Breakouts from congestion where the probability of some breakout is high but the probability of the move going far is low. Starting scaling out the exits quickly, placing targets short of the typical projected extreme of the (“false”, but not really) breakout and then trailing stops with increasing aggression as target is approached works better across time than does any ‘single exit’ strategy I’ve tested. (btw, in certain MarketTypes, subsequent reversions back into the congestion then a second breakout follows, and scaling out is not indicated / not nearly as productive…)

...This type of effort doesn’t have enough utility / is more work than most will tolerate / and or doesn’t occur with enough reliable frequency for most, etc. It is only ‘efficient’ for me because I can heavily rely on granular MarketTyping of the auction for guidance (and also I like it because it seems to happen when I need a bad day turned into an acceptable day, etc.)

 

Again relying heavily on MarketTyping ‘cadence’, there are certain ‘reversion’ conditions in the indexes intraday where I can use envelope projections to scale in and out of short duration positions with better results (and lower overall risk) than I get with single level entries and exits. The upper end of the duration of such ‘cadence’ conditions is about 45 minutes and I typically can depend on going to the well only 2 or 3 times before other ‘forces’ 'mess it up'… hint hint - Placing time windows wherein certain PA must occur is the one common thread to all successful scaling in or out strategies ( in either 'reversion' or 'excursion' methods...)

 

… these are the only examples I can quickly and easily explain … and even these two will be misunderstood or misinterpreted ...

[iwshares 10]

It’s system specific!.

 

While developing a system I'm happy to trade I've spent a lot of time trying to get my head round different approaches to entering and leaving trades. Before designing my current system I decided "I don't like scaling at all - all in, all out's the way for me".

 

With my current system I enter intraday trends on pullbacks. In testing I found that if I took new entries based on setup signals when I had an existing position it was more profitable, even though some will come at the end of the trend and stop out. I also discovered that most profit was made when closing all positions towards what I believe is the end of the trend, rather than hold a position and wait for the resumption which may never happen. If the trend continues I'll take any more entry signals that appear.

 

Without realising I'd developed a scaling in, all out system, despite the fact that I originally "didn't like scaling". This suggested to me thinking in absolutes is not a good way to proceed. Great to see this thought vindicated by others. Hope this experience is of use to this discussion.