Is Scaling Out a Fallacy?

Discussion in 'Strategy Development' started by cashonly, Sep 29, 2005.

  1. cashonly

    cashonly Bright Trading, LLC

    I was considering some of my strategies this evening and was wondering about the wisdom or lack thereof of scaling out of positions.

    Let's take the simplest example. When it reaches a certain target profit, we take half the position off the table, looking to take the other half off later.

    On the one hand, if the trading strategy was solid, why not just wait until you get to the point where you'd close the second half and have that much more profit?

    On the other hand, if you need to unload half, maybe you should be closing the whole position.

    From a dollars and cents standpoint, is this really the best approach. The more I think about it, the more it seems like a psycological panacea. We feel good that we took a profit, and then if we make even more of a profit on the 2nd half, we feel better (maybe not as good as if we had not scaled out). Or if the stock starts retracing, and we close at a lesser profit or even a loss, we feel good that we got some profit out of the trade rather than a much lower profit or even a loss.

    But, it would seem that one or the other is more optimal, and I question whether I should really be scaling out or if I should try to nail down which is the truly better approach.

    Any thoughts?

  2. All psychological,

    Taking half off lets you let the other half "ride"

    If you worked hard to get into one positon, you do not want to go home empty handed.

    Of course this is only daytrading

    When you are doing longer timeframes,

    You can take half on a certain spike

    then start pyramding once another setup on the same equity reappears.
  3. I love scaling in and out of my treasury futures position in the overnight market. Let say I want to be long three futures. I will put limit orders in at one point down from the 5pm close, down 1.5 and down 2 points. I want to make at least on point from each trade so if I get all three filled I will then have sell orders at the closing price, down a half and down one. When these orders get fill I try to get long again at an average of a half point lower. I then try to sell again for a full point.

    This lets me take advantage of the congested markets during the overnight session. Of course this is just a guideline, I make adjustments to account for things like the 2am european open and 4:30am economic releases. I try to be out by 8:10 and use the volatility of the pit session to exit my protective long option positions.
  4. empee


    i dont scale unless i was going to move the market. Although many people profess that its better, I came to the same conclusion. I think scaling is primarily a psychological fix for overcoming the emotional drain of seeing something u sold run, after you have confidence in your system you could care less cause you already onto the next trade.
  5. I liquidated half of a long position in stocks today at 3:50 pm (instead of the whole position) based on the following factors:
    1. The difference between the target price and the current price was still interesting but not enough to justify the amount of committed capital anymore.
    2. Keeping half of the position open contributed to a well balanced portfolio, in which I also had bets on the direction of bonds and oil prices.
  6. just curious cash

    does Don teach the "bootcampers" in his Opening print method to scale in or out of their trades using this strategy ( scale in or out ) ?

  7. I generally scale on both sides.

    I'm usually early on entries and exits. I build positions on scale....then put out the inventory as everyone comes calling. Nothing better to me than scaling out (gradually) of a great position as the crowd realizes they're wrong.
  8. Calling it a psychological crutch is simplistic (although it does make trading more relaxed).

    If you treat each entry/exit combo as a strategy you will (assuming you have designed it well) find that all are profitable but that the combination provides a "better" equity curve than any one alone. For example your longest position might have 1 winning days in 10 but the best return. The fastest might have 4 winning days in 5 but half the profitability. The combination provides good profit, a good sharpe ratio, and relaxed trading. A result worthy of acrary :)
  9. Dustin


    I always scale out of my winners.

    Scenario: If I expect to make 20 cents on a trade then I will start exiting around 15c and on up to 25c to close it. This allowed me to get my 20c average without moving the market.

    If I was wrong about the profit target and only got 18c before the stock reversed then the shares I sold allow me to lower my breakeven point and hold the trade longer than I would have otherwise.
  10. joeper


    I'm not a scaling out fan. I ride it all the way to the top/bottom and get out just after it turns down/up on my long/short.

    Don't set your eyes on the top or bottom, cuz you'll always miss it.


    Joeper the boeper out!
    #10     Sep 30, 2005