Position Scaling on LOSING trades

Discussion in 'Risk Management' started by c.chugani, May 24, 2008.

  1. It is very common to see people scaling out half of their positions on a winning trade and moving up their stops to their original entry price levels. (this ensures that the trade cannot turn into a loser and at worst, will end up breaking even).

    I wonder if people scale out half their positions when a trade goes AGAINST them as well? Assume a 5% stop, does anyone liquidate half of their position when the trade goes against them by 2.5%? Wouldn't this strategy ensure that our total losses are cut by half?

    Why do people only scale out on a winning position? Surely if you enter a trade and the market goes against you (thus proving your entry wrong in the first place) you should seek to minimise losses instead of waiting for your stops to get hit?

    Wouldn't scaling out of a losing trade help with capital preservation?

    PS. For those who reply that they it is OK for the market to go against them at first (before reversing and turning profitable), that is why I say to reduce your position to half. In case the market DOES reverse and the trade turns profitable again, you still have half of your position to ride out (with the option of resuming your original size if you WERE right in the first place).

    Visaria likes this.
  2. Yes, I scale out of losers. I scale out of winners using profit targets but never really exit a position entirely until the trend actually changes.

    I will often add to a winning position and once in a while add to a loser(don't much like adding to losers though).

    But everything is part of a strategy, though, including % of acct used on each trade, money management, stop loss limits, position diversification, overnight risk, etc, etc.
  3. What criteria do you apply to scale out your trades?

    I assume that if you have a winning trade with an initial risk of -1R and a profit target of +3R, you might liquidate half your position at +1R or +1.5R.

    If that same trade would instead turn against you, where would you liquidate half the size? Would it be around -0.5R?

    Thanks for your insight.
  4. I've heard it often that you should press your winners.

    However, my question is: wouldn't adding to a winner increase your cost basis on the trade?

    ie. you are entering again at higher price levels, so if the trade moves against you, your equity might end up taking a bigger loss than if you had just kept your original size and price entry..
  5. On the trade 'add-ons', I keep those separate from the original position. In other words, there's a stop-loss for the add-on position and a different exit prices for the first positions. I might employ as many as 4-5 entry levels and 4-5 exit levels because there is really no perfect entry/exit other than hindsight.

  6. If you look at your add-on trade as a totally different position and assume that on a technical basis it has merit (not just because it's profitable) then go ahead and add to it.

    It IS more challenging in the market environment of the last couple of years, though.

    But, ultimately you still need to come up with an 'all-encompassing' strategy to combine everything together and employ it all profitably in the time frames you're using.

  7. Just my two cents, based on the way I trade.

    Scaling out of a loser I would never do because when I'm entering I have a defined level which I believe will not break. The setup is based on that level, that number, not getting printed for more than a certain amount of shares, or not breaking. If the market can't break that level, the path of least resistance is the other way and you want to stay with the trade, though I don't know for how long the path of least resistance will be the direction of my position so I scale some out. Once the stock trades against me by the amount I determined based on the setup, I know I'm wrong and move on to the next setup. Trying to take advantage of the fact that a percentage of my losing trades I'm simply an idiot getting shaken out is not at all feasible for my method. My method is extremely random and discretionary.
  8. I notice you are focusing on irrelevant things such as avoiding a losing trade, or staying in a position that has lost money so you can make some back if the market reverses.

    None of that matters. All your prior losses and gains have already been marked to market, you are in an identical situation to someone who just entered the market today with the same position as you. All that matters is what opportunity is offered by the current market price.

    Therefore the only logical conclusion is that you should size your position based on the current market environment and your perception of future opportunities. If position X falls by 20% and you think it looks like a poor trade now, then get out. If it falls 20% and you still think it's good, but not as good as originally, then cut half your position. If it falls 20% and you think it's an even better trade than before, then buy more.

    This of course assumes you have some kind of prognostication ability. Without that, no position sizing method will help you.
  9. I understand what you people are saying.

    However my initial argument remains the same:

    why are people so prone to scaling out their winners - in order to minimise risk - and yet aren't so willing to scale out on a losing position?

    Wouldn't it be wise to minimise our total risk exposure on a losing trade, the same way we do with our winning ones?

    Why wait for our stop loss to be triggered?

    What makes us think the market won't take out our stops? For all I know, the market couldn't care less where we place them in the first place.
  10. If my stop is behind a pivot, why do I want to get out of any stock before that pivot has been broken? After the pivot is broken, why do I want to hold any stock?

    Are your entries highly imprecise?
    #10     May 24, 2008