I really appreciate the experienced insight you guys have posted here. The comments that I like the best are about scaling out and the smoothing effect on the equity curve. Handling volatility on a trade-by-trade basis is one thing, but having a smoother equity curve can definitely help in the bigger psycholigical picture.
I scale in always. Never do I get convinced that my entry will work until I see the market move my way. This reduces initial downside risk and allows me a was to stay objectively "in touch" with the price movement (by having a small position to track rather a large one where one tick is significant). In terms of scaling out it is rather simple - assuming the trade has worked, I will usually begin to notice one of three things: 1. The move is consolidating and showing signs of more upside - hold position. 2. The future move is not clear or erratic - exit full or scale out without affecting the market. Usually, if I start to question the move it is time to get out. 3. Intuition/familiarity of the product, days behavior relative to prior days, i.e. experience. I would say that scaling out is a fallacy and a psychological barrier rather than a equity curve or performance mark. Usually the cliche "when in doubt, get out" applies. Scaling out is a form of insecurity/anxiety about the position.
If you don't scale out then that means you are 100% sure that you are at the peak. But, in reality no one can be really sure so I would say it's always best to scale out, and the size of each trade should be determined by the estimated odds.
Without question, scaling in or out will result in fewer profits than an all in all out system. http://elitetrader.com/vb/showthread.php?threadid=78975&perpage=6&pagenumber=1
scaling out is mostly psychological and time-saving. psychology is 90% of trading so always scale out. time-saving because scaling out allows you to quit trading for the day, if you have a strategy that is based on a pretermined trade plan and not real-time price action. saves health and time, what more can you wish
It's a matter of risk vs reward. If risk increases significantly, you should be trading less size; if reward decreases significantly, you should be trading less size. When you get nearer the end of a move, often the risk and volatility is higher due to the chance of a serious retracement or reversal, and the reward is lower because your price target or support/resistance level is closer, leaving less profit to shoot for. Yet the odds may still favour a profitable trade - it just might be that the odds have gone down from 75% chance of making 5 points with 1 point risk, to a 60% chance of making 3 points with 2 points risk. Anyone who trades a 75% win rate with a 5:1 reward/risk ration on the same size as a 60% win rate trade with a 3:2 R/R ratio just doesn't understand position sizing. Psychology has nothing to do with this reasoning.
Wrong. On the same size, it will result in lower returns but result in even lower drawdowns/volatility relative to those returns, thus giving a superior return to risk ratio. One can therefore trade bigger size from the outset, equalizing the risk with the "all or nothing" strategy, yet generating higher returns. Or keep risk bit lower and returns the same. Either is clearly superior to the all in all out system.
The 'theory' that scaling out is always inferior has been disproved in this thread. There has not been one shred of empirical proof for this assertion. http://elitetrader.com/vb/showthread.php?threadid=78975&perpage=6&pagenumber=1 Please note that the member who made this claim is apparently a failed daytrader who subsequently posted that daytrading is inferior behaviour as well! http://www.elitetrader.com/vb/showthread.php?s=&postid=2454530#post2454530 There is no one-size-fits-all approach to trading. Scaling out will be optimal when price action shows that the conditions which obtained at the time the trade was placed have changed.
The correct move would be to remove the entire trade at once instead of risking some contracts giving back profits. Common sense folks!