For example let's say that you are trading a system in the ES with a 3 point stop and a 6 point profit target. --You don't take profit at 5 points, you let the whole position run to 6 points. Common Sense.
Unless it only reaches 5 points and then retraces. Then you lose 3. Hey, if you can arbitrarily decide how far the market will go in your examples, then so can I.
LOL If the positioned moved 5pts in your favor, hopefully you would have at least moved your stop to cover your entry price. If a trader didn't have the sense to at least do that much, the rest of this conversation is moot. JJ
Of course, if you decide to scale out, you will never get the maximum possible profit -- in retrospect holding the max position versus scaling will always be better. But how many times will you exit entirely, and then see the market have another leg up? Or how many times will you decide to hold the entire the position, then watch it go back to your break-even point? Scaling is just cutting off the best and worst case scenarios.
Thereby smoothing the equity curve. There's something to be said for calm waters, especially when you're out at sea in a rowboat.
And if it only gets to 5.75 points, then what? You ride it all the way back to breakeven? Or, maybe you decide to cover at some point once you realize the trade is unlikely to reach your 6 point target. Had you scaled out near your target, you would have wound up with a greater profit, than blowing it all out at once.
Yah, and that may happen on several trades in a row and probably get very frustrating.... but who cares... the one or two times an hour (or day..or..week..or whatever time frame you're trading in) you are able to catch a decent run and really build a position up you'll make 10 times that amount.
Exactly. And then there are those of us who actually trade for a living. So scaling out (or in) makes a lot of sense. Having studied optimization in grad school I can say that no one is going to maximize their profit on a trade very often. And the old saying that "you can't go broke taking profits" applies very well in the above example where a trader holds out for his 6 points and ends up losing 3 on a selloff. In my book +5 (or any profit) is a lot better than -3.