[TheNegotiator]

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]

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]

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

[MightyMouse]

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]

[QUOTE=TheNegotiator;13744 8][QUOTE]

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]

Originally Posted by MightyMouse »

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]

Originally Posted by TheNegotiator »

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]

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"