I've traded a long time. Much of my success has come from a relatively small percentage of plays/years. (Trading's version of the 80/20 principle). Almost all years, I've made OK/decent money... depending how you quantify that. But a few years, I made BIG money... at least for me... multi $MILLIONS. So... I preserve that and continue to keep trading enough to keep my wife in booze and shoes... don't need more than that.) You can "play not to lose"... trying to make "some" while "hedging every which way".... and think "you're trading successfully" if you have small/modest gains. Or, you can go for real success. But to go for real success, you have to be cognizant of the downside for trading that way... and use stops when wrong. Always protect capital, live to fight another day.
Xela has kindly trailed my name in her post above and I think this is such an interesting subject - it focuses on exits and maximising profits, rather than the usual - which is entries and minimising risks. I don't scale in and I don't scale out. However, I am adding a new full-scale trade to every winning trend-following trade. This is by stop order as soon as the initial trade hits break-even: as the new trade opens, with the same capital risk as the first, I move the stop on the first trade to b/e. When the second trade opens I set another order for another trade at the same distance on. When that triggers, the existing trades's stops are pushed on again the same amount and a new order is set. Etc. etc. Free margin pays for each new trade. If you don't have the margin, close the earliest trade and use its gain. If the trend fails, all stops will be hit simultaneously and all trades closed. This is a great way to gain exposure to extraordinary profits at no additional capital risk. The sacrifice is firstly small early gains and secondly the top slice of unrealised profit from each stopped out trade. Comments welcome of course.
Not to appear pedantic, but this is the essence of efficient operation -- you are operating at the margin. You treat every entry, every addition-to-position, every piece-out, every exit, with an eye not towards what was previously engaged, but instead asking the question, "What's the best use of my capital right now??" That's just the sort of thinking that every econ department should *try* to inculcate to *every* student -- from Econ 101 way past those troublesome MBAs. Sunk costs are sunk. The right question to ask of your capital (or, your extant trades....)
I have done some calculations about this some time ago. Here's what I found roughly (without the numbers). Profitability: Scaling in > No scaling > Scaling out Psychology difficulty: Scaling in > No scaling > Scaling out Risk: Scaling in > No scaling > Scaling out Volatility (Equity curve): Scaling in > No scaling > Scaling out It is up to you really. Another 2 most important factors to be taken into account are your winning rate and risk reward ratio. What's your average for those 2?
%% Good points; an advantage to scale in, maybe one gets someday big enough-where you have to scale in .....Another advantage, tops + bottoms are an area, never a single point except in hindsight