I am not sure what this means, but if by it you mean that it is not a loss until you actually book it - I strongly disagree with this "philosophy." I also disagree with the philosophy that it is easier to play with money you have won, because it's the house's money or "it's not my money." IMHO (again, I am not sure this is what you meant) these are desctructive attitudes, and will affect your effectiveness as a trader. nitro
Thanks for the replies.... I do like the idea of scaling out of positions. TriPack you hit the nail on the head when you talked about exiting a profitable position. This is where I often have trouble. I do a good job of cutting my losing trades quickly but exiting a profitable position is what I am currently working on. I know this subject has been tossed around here on elite before and some folks don't agree with scaling out of positions. I think it really comes down to what type of trader you are. A pure scalper should take their profits all at once but for us "position daytraders" scaling out may be the better option. I do like to put all of the position on at the same time though... Time to work on this scaling out thing Leland
If you are interested in scaling out, you may enjoy: http://www.futuresmag.com/futurescl...om/phantom.html nitro
Yes the reason a scalper likes to exit all at once is because a scalper typically doesn't want to hold through a pullback. A pullback might take all their profits away because the "usual" scalp is a relatively small range operation. However if you are an intraday position trader you pretty much have to ride through some pullbacks to let those profits run. I think having a hard profit target would probably work better for someone who scalps more than for someone who position trades but that's just my opinion. Nitro: the link above didn't work, try this one (one of my favorite books): http://www.futuresmag.com/futuresclassroom/phantom/phantom.html
I think that if there were a holy grail it would involve the exit strategy. When you pick an entry point all you've speculated on is the direction of the price, and there are only two possibilities, up or down, long or short. The exit on the other hand has hundreds or thousands of possibilities, both for a stoploss and profit exit. Figuring out how to exit at the best price will minimize your losses and maximize your gains, and the ratio of the two determines your profitability.
Exits are important, and can often make the difference between a profit and a loss. But you can say the same thing about an entry - the entry was favorable so you didn't get stopped out or it was unfavorable so you took a loss (even though the direction was ultimately correct). You get to select the time and direction for both entries and exits, and can utilize a number of order types to do that for each. The difference as I see it is that money is not on the line UNTIL AFTER the entry. This is why it is perhaps a more important and also perhaps more difficult skill to do well because of the added pressure.
The importance of exits are two fold: 1. The obvious - keep as much of the profit as possible 2. The less spoken of - to help control overall position risk For non-scalpers, risk management is probably the most important and least understand element of trading. Everyone's heard the trading maxim "Cut your losses and let your winners run". The key aspect of that is the warning to manage your positional risk because if you do the profits will develop. So #2 above is what those who believe in scaling out (or profit taking) are ultimately interested in. As already noted, it's not of particular importance to most scalpers, but ongoing risk management is particularly important to intraday/multiday swing or position traders. Over the long run, minimizing overall losses is at least as important as basic profitability. Ordinary profit targets (i.e., exit the whole position at X) and trailing stops aren't always the best approach. Ordinary trailing stops can work OK in trends but in choppier markets aren't as effective/profitable. Profit taking is especially meaningful/useful to those trading based on support/resistance. Simplistic example: Let's say you enter 1000 shares long at 50 with the thought that the price might extend to 60 over the next couple of day. But you see that there's potentially strong resistance sitting at 52 and 54 before there's room to run to 60. So as the trade progresses, if the price action starts to stall at 52, you might sell half of the position at the +2 level and then move your stop to 48 (a net breakeven stop). You might alternatively move it to breakeven (depends on the volatility of the stock). So at this point, you're still targeting that it could go to 60 but short of a catastrophe you've reduced your positional risk to near zero. Now if the price gyrates around for a while and finally breaks out through 52 but then again stalls at your 54 expected resistance level, you sell part of your remaining position at 54 and move your stop to at least breakeven (again depends on volatility but at this point you'd want no less than a breakeven stop). So at this point, with partial profits in your pocket and a breakeven or better stop, short of a catastrophe your overall position is profitable with near zero position risk. Now you can be especially comfortable letting your remaining position run (if it's going to) with some profits in your pocket and almost neutral risk. There are variations on the theme - for instance, using profit taking stops rather than hard profit taking targets. So in the above example, if you're looking for resistance at 52, rather than simply taking partial profits at 52 you might start a 1/2 point trailing stop to sell part of the position. You risk 1/2 point (or whatever is appropriate based on the stock and the trader) in exchange for possibly getting stopped in profit taking at a higher price. The possible advantage of this is that if the resistance is broken before your profit stop is hit, you might be able to kill the profit stop and let the breakout develop further and delay profit taking. Effectiveness depends on how large of a profit stop you're willing to allow, how volatile the stock is, and whether the price action really just congests at resistance slowly eating through it or is repelled by the resistance. Note that some who have criticized the idea of partial profit taking often base it on backtesting using fixed profit taking intervals. It's reasonable to assume that such profit taking might perform suboptimally. It's also confused if most of the comparison period is in trending rather than choppy market. Finally, fixed profit taking intervals aren't an effective comparison because it doesn't recognize the basic idea of taking profits ahead of key resistance (or support if short) rather than simply at some arbitrary fixed interval.
Well, to me it's _ALL_ about the entry. I am a scalper, therefore I submit a hypotheses: The shorter the time frame, the more important the entry. The longer the time frame, the more important the exit. These two are two sides of a coin, or perhaps two sides on a scale. nitro "It's when you sell that counts"
Archangel summed it up well: the key to effective money management is setting up a number of scenarios where you simply can't lose, and can possibly end up with a very large profit if your market has a large continuing move. Worst case when these scenarios set up is that you have taken a small profit.