Scaling in/out: Crutch for the Weak

Discussion in 'Risk Management' started by billyjoerob, Jul 17, 2010.

  1. Let's say that over your entire trading lifetime you make 10000 buys and 10000 sells. Buys average $35 and sells average $37. Not bad.
    Let's say another trader makes 2000 buys and sells at the same prices and same total size. Both come out with the same profit. Scaling in is irrelevant, just adds to transaction costs.

    By scaling in and out of positions, you're scaling in and out of your lifetime portfolio a fraction at a time, a waste of trading fees. The idea I suppose is that you will get a better price versus the initial buy -- the notorious "I lowered my cost basis!" - but only if you average down exclusively. If you average down and average up, then your average price will in all likelihood equal your initial price over your trading lifetime - what was achieved? And if your initial buys were well-timed, then scaling in will only hurt your profits.

    Of course this doesn't address the whole pyramiding issue - in that case you have more information and scaling in (or pyramiding) is actually a function of trading based on the information contained in the price action. That might be a good strategy. But that's not what people mean when they talk about "scaling in/out" of a position. What they mean in that case is raising their winning percentage, which is a crutch for those who don't want to be wrong.
  2. Are you arguing for buy-and-hold, entering new positions only as your increasing wealth allows?
  3. No, I'm not advocating buying until you are about to die and then making one massive sell order, to rack up your final score. If that was your question.
  4. A simpler way of making my point is, don't worry about scaling into your positions . . . in the end it all averages out. And if your initial buys are good - as they should be, otherwise why bother - then scaling in is actually a drag on performance.
  5. It's interesting that none of the defenders of scaling in/out as a valuable form of money management are willing to defend it . . . It may be indefensible as anything other than a psychological crutch ("sure my first buy was bad but now I can scale in, spread my risk over time, reduce my cost basis, etc.) for those trying to improve win rate at the expense of profitability.
  6. schizo


    I never know when to get out when I'm wrong (FEAR) and I never know when to get out when I'm right either (GREED).

    So I average down and up and down and up and down and up...
  7. What you are saying is that you are an average person.
  8. Interesting. Often people fail to get out of a losing position out of fear of "missing the move" . . . "Man if I take the loss and miss the move, that's doubly painful." Nothing worse than getting stopped out AND missing the move. It's almost a prospective aversion to future regret . . .

    If you enter each position with a stop, then no worries . . . If your stop is hit, you were wrong, and move on. The good thing about a stop is the precommitment . . . It's a bit like stapling your stomach. You couldn't eat a big tub of ice cream even if you wanted to.
  9. This is great. Good for you.

    You are saying you can easily pick the exact top and the bottom to buy and sell.

    Buying 10000 shares of stocks in one shot... no problem. Easy fill.
  10. Who said anything about picking tops or bottoms?
    #10     Jul 17, 2010