Bingo! You have made part of the case for why scaling out is an inferior and scaredy cat strat. This stategy is an emotional crutch used by overleveraged traders who are simply anxious to get back to a position size that they can live with emotionally. It's better to start with the correct position size from the beginning. http://www.elitetrader.com/vb/showthread.php?s=&threadid=78975&highlight=scaling
If you say that trading should be void of emotions, I agree, however in reality, emotions will always play a role for most traders. (most beginning traders also) I am not talking about just scaling out, I'm talking about both scaling in- and out. Scaling out at itself is a great thing, seeing as traders not only get their judgement of whether to stay in a trade clouded by emotion but also by their inability of clairvoyance. You might say then not to take a trade, but I am talking about scaling-in and out not only for higher probability trades, but also for higher risk lower probability trades. It is a tool that is very useful for people who notice that not every trade has the same equal probability. If you take only 100% trades, you will get far less trades to take, maybe once a week. For that, scaling in and out probably wouldn't be too useful. Program traders don't have this problem. They buy and sell, short and cover, but each trade has the same (average) probability. For me personally, I view scaling in and out as a valuable tool. I believe you're talking about a different thing, you're talking about traders who go all-in on a trade, then "scale-out" of it because they're scared of taking a loss. In case they have a too big of a position, It is indeed prudent risk management. However getting in a too big position at the start isn't part of good risk management. I'm taking about scaling- in and out as part of a complete risk management plan for every trade. I believe that's why we seem to differ in our opinion on this subject, we are talking about two different things.
Anyone who feels that they need to scale out has taken too large of an initial position. http://www.elitetrader.com/vb/showthread.php?s=&threadid=78975&highlight=scaling
Latest post by Austin discusses a different perspective, and instead overweight scale-in into a winning position. Strangely enough no one commented that POP rule-2 like post. http://www.elitetrader.com/vb/newreply.php?s=&action=newreply&postid=1870862
You will never make it to the top trading a 1 lot and always being afraid of making the jump. Using your rules there would rarely be any young traders killing it. They would have to wait years in order to first build a high net worth before they could ever even trade. Leverage is not a concern when one has a stop and the discipline to ALWAYS implement it. If anything is a an emotional crutch it is the 100+ point stops that you advocate.
I think you could say for example if you have a wide stop and profit target scale both in and out. For example, you take some off the table and move up the stop when you are profitable, however, you do the same if you are negative. This may even work better in investing in stocks. Instead of averaging down into a losing position, sell some of the shares, same when you are in a winning position. I recently averaged down in my RMBS position at $ 8/sh, of course the stock then continued to fall to $ 5/sh so I was down on both my initial and 2nd position. However, when the stock hit $ 13/sh, I sold a small amount of my position, now the stock is almost at $ 14/sh, but I plan to keep the rest till its much higher.
IMHO I believe by scaling in and out a person can actually get to a point in the day where they are trading on free (the mkt's) money And once this person does this - they will find it a very liberating experience (stree and emotionally speaking) I agree this may be hard with the moves we've had - but it's always in my tool kit when the time's right Another one of those counterintuitive things Take Care
Anyone bother to look at OP's attachment. How did scaling out hurt him? He's assuming that he got the max. exit price, but what if he had closed at the first exit?
just try to think about this example: you swing over several days and your initial $10k position goes up by 20% the first day (quite usual these days in junior companies). you suddenly have 20% more risk - why would you keep it on? you sell $2k to keep your risk unchanged assuming other fundamentals do not change (which is maybe unlikely given that the pos is up 20%). cutten post says it all...
for stock buyers... why scale up or down a stock... if you can do it on a'' put spread '' or other spreads and getting some decay at the same time....