Van Tharp, Scaling out of a winning position

[osho67]

Hi,
Not sure if this is the right board to post this general question, but I've nearly finished reading
Van Tharp , Trade Your Way To Financial Fredom and I've read Trading In The Zone by Mark Douglas, and in Tharp's book he says that if you exist a position in stages and leave the remainder of your position for a large gain than this is incorrect, while Douglas states the opposite and recommends that you do this.

For example, Douglas says you have 3 contracts, let's say on the Dow Futures, as soon as you make some profit then close one contract , then wait some more and if you make some more profit close the 2nd contract, thereby adding to your existing profit, then move a trailing stop to break even on the last contract and leave it to capture as much profit potential as possible, so you now have a risk free position.
Anyway, Tharp's does not recommend this, and says it would be better to either exit the entire
position if it meets your exit criteria or let the position accumulate profits until you decide to exit at a suitable stage, e.g a retracement proft exit.


I'm not trying to give exact details here , just wanted to know why Tharp doesn't recommend the first approach, I think it should make more money?

Does anyone have any thoughts on this method of scaling out of a position, I'm sure I've heard that it is a good idea?

 

[Trader333]

In theory, "scaling in" makes more sense than scaling out but it is extremely hard to do psychologically so no-one does it. Personally I scale out at key points and it has worked well for me as it allows me to lock in profit and then the remainder of the trade becomes free.


Paul

PS. I should have said that I trade Intra-day only

 

[Buk]

agree with Paul, I trade FX & scaling out at designated target levels offers profit lock with the potential to catch a move away on a run. Once (if) your remaining position runs, it also affords the opportunity to scale back in on breaches of key levels up & down the ladder to maximise a move.

 

[Mr. Charts]

osho67,
This really depends on whether you are scalping and/or looking for longer term gains or both.
I coach people giving them specific exit rules, some of which include closing the whole position, sometimes half depending on the move itself. This works well.
However, you can trade a ltttle differently by scaling out some of your holding at scalping targets. For example, say you are long and you almost hit resistance and can read downward pressure, then close out maybe two thirds of your position to lock in profits. Then if longer term time frames show the move is still valid and the current bounce is merely wiggle space as people take profits, you can hold your reduced position size for the bigger move. In other words, look to scalp and make money initially but allow yourself the ability to benefit from a larger move. I trade scalping moves in fast and/or choppy environments but in longer ranging moves look to gain from both techniques.
What is very common amongst inexperienced traders is the approach of taking profits after specific percentage gains or cent/dollar gains. In my opinion and experience one should trade and move dynamically WITH the market and not try to impose artificial take profit levels. The market doesn't know or care whether you entered at a certain level and will move to where it wishes to, regardless of your circumstances, so why try and impose some arbitrary level.
What is essential, I believe, is to be in harmony with market sentiment and trade accordingly.
Not to be controlled by it, just control yourself, to the point where you can go with the flow, not with your emotions - then you become a free trader. And profitable.
Richard

 

[TheBramble]

Osho, scaling in seemed (seems?) the way to go for the big operators. They want to see how the market reacts to their play. But for the likes of you and I, I don't think there's much in it.

As Paul says - it's a psychological thing. If you're right - you're right!

However, if you ever get to the point where your trade moves the market - let me know (ahead of time!).

 

[osho67]

Hi,

Thanks for the replies, very much appreciated.

 

[John Cyprus]

I would suggest that once you are in profit, at least raise your stop to breakeven and then if you are trading for the big ones then let it run until it runs out of steam.

Exiting is a tricky area but you need to know in advance an exit area that you are aiming for. THis is what I was taught recently and it works for me.

 

[barjon]

Kaufman has it that the best risk/reward ratio comes from the reflecting pyramid involving scaling in and scaling out. Apologies for amateurish drawing!!

 

[RogerM]

With options I both scale in and out. Generally with written positions where the potential profit is fixed at the outset, I close out early if 50% of the potential profit is on the table after 25% of the time. If I can remove one end of a strategy early using the same criteria - the "put end" of a strangle for instance - then I take it. If it is a larger position than normal, then I take some of the profit early to ensure a "pay-day". And at any stage, if I can close short ftse puts for less than 4, then I do so.

 

[BBB]

Excellent!

For once, a thread about a real trading issue and how to make money. Well done Osho67.

As for my opinion - scaling out. That Mark Douglas book you have purchased will do you well if you study it (ok the boy and the dog analogies are a bit much). Pay attention to what he says about trading and probabilities as well. This is one of the few books about trading that is worth any money at all.

The secret to making money is taking profit when its there and early. Scaling out allows you to do this, while also allowing you to keep some of the position should the move mature in to a biggie. Either way, you win. Mr C has explained this very well.

VAn Tharp (whos books I have never read and never will) method is for greedy suckers who know nothing. (although as Mr C points out its as much to do with strategy and method - exiting in one go when scalping makes sense) I doubt he has ever traded. I did flick through his book in a bookshop once and laughed. I told the assistant to put it in the Light Humour section where it belongs.

 

[donaldduke]

Its ok to scale out if the first scale out point is larger in magnitude than your stop distance
was from your entry point.

If you read the Douglas book, he uses this strategy because 90% of his trades always go in
his favour by a small amount. The strategy is not optimal but will increase the number of
of winning trades he has and make the trading process psychologically easier to handle.

If you look at Douglas's system you will notice that he would make more money if he didnt
scale out.

If you examine his Bond system: the first scale out of each trade is effectively a system that that risks 6 ticks to make 4 ticks . However the hit rate must be higher than 66% for him makes money in the long run using this strategy.

This is not a strategy that most good traders would follow on its own so why do it as
part of a larger trade?

For systems with lower success rates, taking quick partial profits (but full loses) is likely to
reduce the overall expectancy much more greatly and may even result in negative expectancy,
and this is the point that Van Tharp makes in his excellent book.

 

[sidinuk]

I think it entirely depends on how your particular strategy works. In my experience though, both scaling in and scaling out will diminish overal returns.

 

[BBB]

DD - What happens when the market makes a sudden move against a traders position, but the greedy little trader is still hanging in there for his 1:3 risk reward ratio/target? His stop gets hit and hes out. The alternative of course is to use a wider stop. This obviously means exposing your self to more risk. Why would a trader want to do that?

Its the old 70% of sure £500 now, or 20% of of £1,500 in an hours time. Which would you take? I can assure you, that if you take the first option you will be better off in the long run, not only that, but you can also take a cut out of the £1500 occasionally.

As you point out, he (Douglas) needs an edge of 66%. But you also say that 90% of his trades go in his direction right away - so in other words, he can make (small) money on 90% of his trades. If you throw in the wonders of compounding your returns, it becomes clear this is an excellent method to make good money.

Whats wrong with risking 6 ticks to make 4 ticks, if the probability of making 4 ticks is significantly higher than losing 6 ticks. VAn Tharp probably makes this argument in pure risk:reward as he doesnt understand the price discovery process. He probably thinks its 50/50 either will be hit.

I cant agree with your 2nd from last paragraph. This is a strategy that MOST good traders DO follow.

Your final paragraph just doesnt make sense to me. You talk of lower success rates. If a system has an edge of less than 50% or 66%, who would want to trade it anyway?

We can talk about this till the cows come home. I respect that you are a Van Tharp follower and if it works for you then great. It depends on whether you are relatively risk adverse and like to make small consistent chips at the market, while also being in when a trend really takes grip (dont forget, its not a crime to add to your position either), or whether you are happy with a load of knocks in your account, knowing that when you do finally have a large win (despite having to trade a smaller size because of the previous drawdown) you can cover all your losses and perhaps, if your lucky, have some profit as well.

 

[donaldduke]

Whats wrong with risking 6 ticks to make 4 ticks, if the probability of making 4 ticks is
significantly higher than losing 6 ticks.

This type of method will make money buts its an amatuer way of trading.

 

[BBB]

Why?

If it makes money, then its doing better than the 90% of most traders.

The idea isnt that you exit the whole position at this level, you just take some off to the bank and ride the rest.

 

[DaveGos]

I day trade but over the last couple of months I have been swing trading as well. With the need for much wider stops with this type of trading I decided to minimise potential losses by taking a small position to start with and then once in profit I scalled in at pullbacks moving my stop to break-even at the first scale in.. I then take half my profit at my target or earlier if I believe the trade is failing, the remaining position I let run.
To me this system makes perfect sense it minimises my risk when I am most exposed i.e. when I open my position, it allows me to increase my position with almost zero risk and delivers a a good number of small profits and the occassional large one. OK it's not very exciting and there are a lot of break-evens but I'm not in this profession to be excited I'm in it to make more money than I lose.

David

 

[Buk]

can't see too much wrong with that strat Dave!, small consistant chips at the rock with a couple of decent runs now & again will keep you in the game!

I use a similar strat meself (intraday evolving into a swing), paring out & adding in on key breaks....never done me any harm!!

 

[zow]

I.m.h.o. scaling in AND scaling out is definitely the only way to trade (unless perhaps you are scalping) for two further reasons that I don't think have been (explicitly) mentioned:

1) If for example you have set a single target price with an instruction to buy when the market hits that specific price, are you not in essence saying "I think the market will drop to this price and no further" ?
Is there not a very good chance it it drop further, maybe just a few ticks, before it reverses and shoots to the moon as you predicted?
Even worse, it fails to reach your target buy price by just a few ticks and then it shoots to the moon leaving you behind.
Put a slightly different way, by setting an absolute single target price you are saying you want to catch the absolute top/bottom of any move!
Who has managed that on a regular basis?

2) It is good practice for the future when you really are a truly massive swinging d**k and there is no way you can get filled in your size at one price!

 

[TheBramble]

I day trade but over the last couple of months I have been swing trading as well.

David, I admire your ability to handle two different timeframes simultaneously. For me, in the past when I've tried it, I've allowed each to encroach upon the other. Allowing my timeframe to 'adjust' to suit market conditions rather than by trading plan. (I know, typical newbie problem of suddenly switching from speculator to investor...).

However, if the scaling-in works on the swing-length timeframe, why wouldn't it be equally applicable, in your opinion, to your intraday stuff?

 

[DaveGos]

Tony

I do scale out on intraday on occassions, I havn't tried scaling in mainly because I'm happy with my current entry strategy, which as you know is VWAP based and my stop loss rules which are based on level 2.
Dave