Scaling in/out: Crutch for the Weak

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

  1. schizo

    schizo

    Just for the argument's sake, I want to point out that the OP is incorrect in his assertion that "both come out with the same profit (loss)".

    Suppose Maxine bought 1000 shares of XYZ at 70 with the stop placed at 49. At the exact moment, Minnie also bought 500 shares of XYZ at 70. She plans to double down should the stock fall down to 60. Unfortunately, the damn stock closed the day at 63. To make matters worse, XYZ gapped down and opened at 59 on the following day, at which point Minnie's order was executed. Two days later, XYZ went down even further and both Maxine and Minnie got stopped out of their trades at 49.

    Now let's do the math and see who lost more. Maxine or Minnie?

    Maxine: (70 - 49) * 1000 = Loss of $21,000
    Minnie: ((70 - 49) * 500) + (59 - 49) * 500) = Loss of $15,500

    Well, even though they both lost money, Minnie, who scaled into her trade, clearly came out less bruised than Maxine.
     
    #21     Jul 18, 2010
  2. I didn't read all responses so if this was said disregard...


    A. i Never average down..

    B. I never hold losing positions, so scaling in is the only way i will take a position.

    I take a small position until the trade moves in my direction, if it starts to move against me a small position enables me to take a little pain, 1% max.. as the position moves my way i will keep adding when i expect up moves, and take size off of the table if i fear it will move against me...


    I never keep chips on the table if i suspect something will move against me then add more as i feel it ill go my way...
     
    #22     Jul 18, 2010
  3. Piffle

    Piffle

    There are 2 threads going on at the same time with a similar topic, so I'll post my point from the other one here. What happens when you pick the right stock to start entering, but you only have a tiny initial position on when it shoots up in your favor. You have the smallest position on when you are right. Conversely, what happens when you average in all the way to bankruptcy? You have your largest position on when you are stuck with a stinker. This doesn't seem sound to me.

    Why not wait until you think it at the actual bottom and enter then? Is it because you don't know if the spot you are entering has a positive expectation? If you don't know where your best point of entry is to maximize your expectation, I would argue that it is very possible you are using scaling in as a crutch. No amount of scaling in can beat entering your entire position at the point of your best expectation as far as returns. This is a mathematical fact. Anyone who has done extensive backtesting with various entry/exit models knows this.

    If you are trading a "system" that you have not tested and have no idea of where to enter to maximize your expectation, and are more trading your "gut" maybe this isn't correct for you. I have no positive trading experiences with gut trading, so I can't speak to that.

    I had to go dig up this post from austinp because I remember reading it a few years ago and it really made an impact on me and moved forward my understanding on position management (along with some of acrary's great posts). There are some great discussions in this thread. I'd recommend everyone read through it if they have a chance.

    http://www.elitetrader.com/vb/showthread.php?s=&postid=1237674#post1237674
     
    #23     Jul 18, 2010
  4. Piffle

    Piffle

    You can't give one example trade and say that proves it. You have to take a holistic view. What happens when they both enter at 70 then the stock shoots up to their profit target before it goes down to the second entry?

    Maxine: (91-70) * 1000 = win of $21000
    Minnie: (91-70)* 500 = win of $10500

    So with these two trades together, Maxine is break even and Minnie is down $5000 bucks.

    If this setup is such that it will actually go down to 60 most of the time before it shoot up to 90, then you should enter your entire position at 60 and just ignore 70.

    If this setup is such that it WON'T go down to 60 most of the time before it shoots up to 90, then Minnie is going to lose a ton of money over time.

    One spot or the other is the optimal entry. It can't be both.
     
    #24     Jul 18, 2010
  5. And if grandma had balls she'd be grandpa. The fact is that the market isn't only open one day a year, therefore such thought experiments have no value in the real world. And I find it ironic that you're using Warren Buffett as your example, considering he himself has scaled or averaged into many of the positions he's taken over the years. :p

    Sorry, but this makes no sense, and furthermore the facts do not agree with you. I'll give you a real world example. During the crash of 2008, I had been watching the gold mining fund GDX, which by the time I began buying it had declined over 50% from its recent highs. My ladder of purchase orders began purchasing it at $25. I had no idea it would bottom just below $16, but my ladder allowed me to increasingly purchase more shares for the same amount of money as the price declined all the way to the bottom. Therefore, my average cost on the fund was just below $20, whereas had I done as you said and made my entire purchase at $25, my cost would be, well, $25. And last time I checked, 20<25, is it not? :eek:
     
    #25     Jul 18, 2010
  6. Two parts to this query. First, I can't recall a single time I've ever done this where my initial order turned out to be the exact top or bottom. I wish I were that good. :D

    Second, as far as "averaging in all the way to bankruptcy", that isn't possible if you practice sound money management with respect to your trade. For instance, I never allocate more than 20% of my total net worth to any single asset position. Therefore, even if somehow I turned out to be completely wrong and in a hypothetical scenario the asset went to 0 (which is strictly hypothetical, since I don't trade individual stocks or assets that could ever go to 0), I am never at risk of permanently crippling my net worth.

    Furthermore, if you establish a methodical ladder of orders using only small incremental amounts at each rung, you give yourself plenty of room to accumulate a position at more favorable prices, even if it goes to a much further extreme than you had anticipated.

    And finally, you have to know why you are getting into a position, as I described previously. If you are stuck with a "stinker", chances are you didn't do your due diligence to figure out why you were entering that position to begin with, or you didn't heed the reliable indicators that can be used to guide the wisdom of the position. I won't get into all the philosophy behind how I trade and why I choose the assets I do, but needless to say by following a strict methodology, this strategy works for me better than any other I've ever used.

    Why not wait until I think it's the actual bottom? Because I'm not stupid or arrogant enough to think I could possibly pinpoint at one exact price level an exact bottom or top. Talk about arbitrary! If there's one thing I've learned over the years, it's that the market couldn't care less about what my "expectation" is as far as exact price levels. It will bottom or peak where it bottoms or peaks, regardless of my expectations. But if I can use reliable indicators (which I can) to identify general bottoming or topping processes, then I don't need to pinpoint a single price level. See my above example with GDX.

    Ultimately I couldn't care less about what you wish to call it, the only thing I care about is what it does for my brokerage account balance. So call it a "crutch", call it a "strategy", call it "tiddlywinks" for all I care, it matters not to me.

    Nor can I, since I'm not trading on "gut" instinct either, I'm most certainly trading a system. You seem to be stuck in the mindset of "maximizing expectations", which to me is nothing more than picking an arbitrary level and hoping you were right about that exact level. Which to me is no different than going to roulette in Vegas and betting it all on 23 black. So if anything, trying to pick one singular price level as an absolute entry is far more of "gut" trading than the method which I employ. But hey, to each his own, if it increases your brokerage account balance consistently, it's all good.
     
    #26     Jul 18, 2010
  7. <strike>Three points.

    <scratch>1. All or nothing approaches in an environment of uncertainty are questionable at best.

    2. Adding to a losing position is like driving faster when you're going the wong way.

    3.</strike> If you have something that works for you and has proven itself over time under varying conditions, then who gives a shit what anyone else thinks?
     
    #27     Jul 18, 2010
  8. Trading can't be discussed like the military; my way or the highway.

    It's very personal, very intimate, goal is to increase capital while protecting as much of it as you can.

    Must keep an open mind and respect other trader's choices.

    There is no ultimate better approach is whatever makes you feel at home when attacking this hard profession.

    Scaling in or not
    Scaling out or not
    Indicators or none
    Stocks or futures
    Volume or none
    Trend or Countertrend
    Time based charts or volume
    Day or night
    US or Asia
    Lines or no lines
    Candlesticks or bars
    News or no news
    Scalp or Swing
    Fundamentals or technicals

    Who cares as long as the statement has green overtime?

    Keep an open mind, respect your peers' choices and they will end up respecting yours.

    ESD
     
    #28     Jul 18, 2010
  9. This is very well said ESD.
     
    #29     Jul 18, 2010
  10. Piffle

    Piffle

    First of all, I do agree with the to each his own part, so please take my replies in the spirit of friendly debate.

    Second, I completely disagree with the rest of this quote. I think you have it completely backwards. Logic and math disagree with what you are saying. Yes you can still be profitable trading non-optimally. But say you have 10 entry points where you scale into a position. One of those entries is the optimal entry. Backtest and see which one gives the highest expectation and enter your entire position at that point. I would encourage you to read up on expectation and understand how it can help you, because I think you are misunderstanding it.

    If you have found a profitable method, then that is awesome. Very few end up consistently profitable in this game, so kudos to you. My mindset about trading is to always keep an open mind and try to improve what I am doing. I would encourage you and everyone else to have that same mindset, even if you are consistently profitable.

    Besides that, I find that having a closed mind is incredibly boring and unstimulating.
     
    #30     Jul 18, 2010