I just want to add one thing about myself. I am a swing trader and a position trader. As a swing trader I may allow that particular swing trade to turn into a position trade but I will scale out doing so I will eliminate most or all of my risk. I also scale out on negative swing trades. If I buy a stock at 20.00 with an inital stop of 18.00 I will scale out half of my position at 19.00. Some people might consider than "non-optimal" but it has worked for me.
While I tend to agree with you conceptually, I think there is a statistical flaw in the argument. You must assume that the historically optimal exit point remains optimal into the future. Look at the ES. For a long time in the '90's (ok, there was no ES then but the S&P futures is the same thing), the optimal play was to get long and hold through thick and thin. We were in a bull market. That changed and holding overnight after a trend day became a recipe for disaster. Scaling out is by definition sub-optimal, but it is seldom the worst possible strategy. The key however is that if you do scale out, you need to have a valid approach for doing so. Selling a portion just because it shows a profit is definitely not it.
Great points, and my own backtesting confirms them. Let me pose a real world complexity however. In my backtesting, I would generally have an exit rule tied to market action, eg cross a MA or put in a reversal bar. In real time trading however, we have the benefit or curse of seeing the trade unfold. At times we see market action unfolding that gives us the impression the probability of a "z" type trade has significantly decreased. We are faced with risking paper profits against the perceived lowered probability of a z trade reward. What are we to do? Trust blindly or use discretion?
This also is a correct statement. What you have with scaling out, is traders playing to not lose, instead of playing to win.
Bottom line is that it's a personal question that has no blanket answer. The primary rationale I have for entering full size but scaling out is that my entries and exits are almost always non-symmetrical: meaning, I have a higher standard for entering a trade than I do for exiting a winner. Sure, there are a few cases here and there where a clear signal to exit is given, so clear in fact that it merits a reversal of the position. But those rarely occur; if they happened all the time, I would be either long or short round the clock. In most cases however, the exit just isn't as clean as the entry, nor should it be in the way that I see my trades. That's just my personal justification, and it works fine from here. In fact, if you see the markets as "discounting mechanisms" (and I'm sure there are many of you that don't need to for your trading methods), then logic dictates that you scale out of a profitable trade. Why? Price moving in your favor on your profitable entry means that others are finally catching up to your point of view. The more buying/selling impetus that occurs, the further price moves to reflect the momentum. If this shift was the reason for your entry in the first place, you have less and less reason for holding a full position as the shift gets priced in. So in response to the first post of the thread: you are right, I do scale out of a position because I am uncomfortable with the size I am holding - at the time that I start to let some go. It has little to do with how much I held or was comfortable with when I first opened the position. As price moves, so does risk/reward, and scaling seems to be the only logical response for dealing with price as a function of discounting.
We are leaving out the most important factor, the risk vs reward. If a six dollar move is a 6r then there is nothing wrong with taking 3r at three dollars.
These are all relative statements that have no significance without case-by-case detail. But it's funny you wrote the above, because my biggest problem for the longest time was holding my profitable positions too long -- scaling out became my remedy for that.