This is a good description. When all your indicators and experience are saying "be long on full size", then you want to be swinging your biggest line. However, as the move reaches its conclusion, slowly the indications degrade, bit by bit. After a while, the position may still have a profitable expectation, but it isn't the screaming buy that it once was. Your potential reward is less, the risk has increased somewhat, and your probability of being right has decreased. The only rational thing to do is to have a smaller exposure to the market, because the trade is not as good as it used to be. Therefore - scale out as the conditions degrade, until eventually they are not good enough to have any position at all (at which point you start looking to see if the opposite position might be worth taking).
If you are in a winner, it is impossible for risk on the trade to increase unless total reversal is obvious. If the trade is lowering it's expectation due to market activity, it is time to exit the whole position,m not part of it. I understood your post very clearly. My point is clear as well. Profits should run until a signal that must be taken for the full position.
The entire position should be exited, not part of it. It is very obvious common sense to an experienced trader that if the trade still looks good, you stay in fully. If it looks iffy or if there is question about it, you get out fully. By gambling and staying with a smaller position, you are gambling on the future with the old idea of "playing with the house's money" which is extremely flawed.
Oh, and this idea that "scaling out" results in less profit is simply because *taking more risk* results in more profit - when you are right. Of course, that also means you lose more when you are wrong. Holding a full size position right until the moment the profit expectation actually goes negative will make more money if you *if* you are right. However, you will not make more money, RELATIVE TO THE RISK that you took. When you get it wrong (which will be much more often, since you are holding right to the very end) you will take a huge hit. People who scale out will take a relatively small hit. They will have a much smoother equity curve. This will, in turn, allow them to trade more size overall. Their drawdowns are far less, so their overall size can be higher than yours. While you are swinging 10 lots on each position, and exiting completely, they can have 20 lots on during the meat of the move, and then scale down to 5. towards the end Over time, their greater size during the bulk of the move, combined with their smaller drawdowns at reversal points, will mean they significantly outperform you. This is another typical oversight from the "all or nothing" brigade. Because they think in terms of entry and exit, rather than ongoing market exposure, they make position-sizing mistakes at the beginning, middle, and end of any market move.
What makes you think is it impossible for risk on a trade to increase? Why should one move to a flat position when the expectation is still positive?
I think you clearly missed the point. When you base on a shorter timeframe for re-entering (and/ or exit), technically speaking, you are actually doing scaling-out that you weren't even aware of by yourself. Q Quote from Buy1Sell2: As a position trader though, I stay with my original premise and just stay short. We weather the bounces and let the trade run. If I see an obvious bullish divergence on hourly charts, I may consider taking profits and reentering at a higher price, but it needs to be very very obvious. UQ
Folks, I am the biggest proponent here of the 1.5/2 percent rule when it comes to taking losses. Only an idiot loses more than 2 percent of total liquid net worth on any one trade/idea. By letting my full position run, I many times end up with a trade that was 8 or 9 to 1 risk reward which doesn't count trades that I take on monthly charts which is much higher than that. People, this is simple stuff here, not rocket science. Scaling out goes against what we are trying to do as traders which is: Find Winners. Once we find the winners, they need to be exploited. The argument for scaling out as a superior strategy is an indefensible position. Traders , newbies and experienced traders have been duped by either books, brokers or themselves.
Why should one have on identical size for a great trade, as opposed to a merely good one? Let's take an example: 1) Someone flips a coin. For each dollar you bet, heads you win 99 cents, tails you lose 1 cent. You are only allowed to play once. How much do you bet? 2) The coin-flipper now offers different odds. For each dollar you bet, heads you win 60 cents, tails you lose 40 cents. Again, you are allowed to play only once. Do you play, and if so, how much? Are you telling me you would turn down the second bet, just because it was not as good as the first one? It is still a profitable bet to take, isn't it? If you turn it down, you are turning down free money. Any profit-seeking trader would take up the second bet. Equally, wouldn't any trader bet less on the second opportunity than on the first? The risk/reward is not as good, and the expected payoff is lower. Therefore a smaller bet size makes sense. On the first coin-flip, you'd bet quite a sizeable sum. On the second flip, you'd bet much less. So, please explain to me how it would be different in the market. If you still have a profitable opportunity, albeit not as good as when you first put on the position, why wouldn't you take it? Also, since the opportunity is not quite as good as before, wouldn't it be the rational thing to play it on smaller size, commensurate with the lower payoff?
No. I am combining the daily chart with the hourly in this example. I provide some shorter term analysis for readers who are shorter term traders in an effort to help if them and cultivate conversation. The problem with communicating on Elite Trader is that the vast majority of traders here are failed day traders. So, I provide some shorter term stuff. I am here to help and share the knowledge that I have gained over nearly 26 years of trading. The ES Journal was entirely designed as a course in why not to day trade, exposing the frantic thought patterns of a daytrader and how ridiculous they sound out loud, while slowing gravitating to position trading which as you can see from the journal, is the place to be.