Reminder: this discussion is not about where to enter and exit trades. This is also not a discussion of probabilities since that would be an item that a trader would incorporate into their entry and exit point system. This is however a discussion of what to do once the trader has decided where their entry and exit points are. --And full position in, full position out is demonstrably the preferred method as shown in the math 5 posts prior. It's important to not try and confuse this with a suggestion that one should enter at X and exit at Y. I know it may be a difficult concept for some, but you'll get it in time. --Ishmael
In these circumstances it is best to not scale in/out (futures): You are crossing the market in a liquid contract and your size is so small to have no market impact. You are providing liquidity far from the current market price. Scaling can have the following benefits: Smooths PnL which allows for trading larger size in general Reduces market impact One could make the argument that if you are not trading enough size to move the market then you are trading the wrong product. I have found that for providing liquidity on a variety of products that scaling in using 3 clips is optimal.
BS12, You have 2 systems with identical entries. System 1,all in and all out, has a 25 percent return, Sharpe of .34 and max drawdown of 46 percent. System 2,identical entry's but scales out has a 15 percent return,Sharpe of .88 and a max drawdown of 17 percent. Which system do you trade?
what? What else is trading all about if not probabilities. It is only that and nothing else, let aside of course those who approach trading from a degenerate gambler's state of mind which you seem to resemble. How you enter and exit trades is to a huge degree a function of probabilities and thorough research in the area of transaction cost analysis. "Demonstrably"? You have demonstrated jack-shxx so far brother. Lol, and of course do your entries and exits have to do with where one enters and where one exits. If you enter/exit at once vs laddering in and out of positions then of course that will necessarily involve a discussion on price levels, hence "where". Chuckle!!! By the way, I am willing to bet that my average costs of execution as percentage off pnl generated are a fraction of yours.
I dont think he would understand. He would even disagree with the fact that a smaller absolute return at significantly lower return standard deviation can in fact be hugely superior to an entry/exit approach that generates an average higher return at much higher return variation. Also, just to start with anyone who trades large enough position that such would make a material impact on one's decision making, emotions, and foremost account would agree that scaling in and out is the only way to go. Every professional hedge fund and bank prop trader scales in and out of positions whether they trade intraday positions or long-term positions with weeks or months of holding period. Scaling in and out makes for a much smoother equity curve on average because the approach allows for expressing one's strong convictions even in the face of short-term adverse market moves. But sure, if your convictions suck then even an all-in/all-out approach will not save you.
If I may respectfully profer an edit to the OP: Taking profits at a single price point and scaling out of losers is inferior behavior.
A lot more in light with reality but even that may not hold true. I know I get on very thin ice with the following statement but there are strategy approaches where it makes sense to scale out of losers. Think of it this way: How do you define a loser? When you enter a new position and the first tick may go against you, does it mean it is optimal to cut the whole position? It may, however, make sense to reduce position size if the market moves against the original position. (Of course there should be a clear understanding when a trade idea is negated by the market and one should just cut and move on in order to come back to the table tomorrow, able to play). That is pretty much how professional poker players operate as well. Nobody bets all or nothing. It is indeed very much a game of pure probabilities.
Personally, I define the profit target and the stop-loss level at the time of trade entry. My methodology is to derive these points using on-the-run trading range and volatility averages. My sense is that most "traders" ( or at least ET posters ) appear to concentrate almost all their focus and energy into trade entry - and position management/risk is a non-systematic afterthought. Just my perception.
I dont quite get why the OP can not see that scaling out is simply "2 sytstems" with identical entries but different exit scenarios. It is possible that there is a combination can be found that produces more profit or less volatilty/drawdown.To not talk about volatility of return has the distinct look of amateur act. I also believe that different styles of trading have much different personalities,i.e trend following vs mean reversion,growth vs value.Its somewhat foolish to think one size fits all.I wish it were that easy