Van Tharp, Scaling out of a winning position

DaveGos

Active member
100 1
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

Established member
615 6
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!! :cool:
 

zow

Active member
136 0
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

Legendary member
8,394 1,170
DaveGos said:
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

Active member
100 1
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
 

Rupert206

Member
78 22
I nearly always scale into a position. I found out the benefits by mistake. CMC at times doesnt allow me to opena £20pp position on the DOW without a requote/delay.

So I reduced position size down to £3pp and found I would get instant fills. As I am a pattern trader I enter within the pattern in the direction of the overall trend.

If I opened a full £20pp position then thats it, the price ive traded at is final. However what are the chances that you enter a trade and it immeditely guns for your price target? Especially when you are day trading the DOW. The dow can be quite volatile even within a neat pattern.

So I enter £3pp at one price. It spikes higher so I think the break may be on, I add another £3pp. However its a fake break. Its shoot lower below my 1st entry, alot lower infact. The pattern looks good and its hit the bottom of the patterns trendline. I go in slightly more aggressively now. £6pp to pick up some at the bottom. Now even if the pattern fails and breaks below that line, then its a fake, but that £6pp Ive got from the bottom so it wont hurt me as bad had I got the full load at £20pp at one price.

Now im pumped up to a good size position, infact im overweight, I wait for the breakout. accuract rate is 80% for me on pattern trades at the moment. The initial break takes hold. I start scalling out on the breakout/spike. Position size goes from say £30pp down to £10pp. I caught a good many points at £20pp. Now I let the £10pp run. Ive locked in a good profit and its gonna take quite a bit of retracing for me to be at a loss. But now I can observe with more confidence and see how to play it, does the breakout look good or not? If it does let it run to the full target.

If it looks really good then go aggressive again and start adding on pullbacks.

Discovered scaling completely by accident but its excellent strategy for an active day trader to use.

Increased you risk/reward substantially and will smooth out an equity curve too.
 

timsk

Legendary member
7,600 2,375
. . . So I enter £3pp at one price. It spikes higher so I think the break may be on, I add another £3pp. However its a fake break. Its shoot lower below my 1st entry, alot lower infact. The pattern looks good and its hit the bottom of the patterns trendline. I go in slightly more aggressively now. £6pp to pick up some at the bottom. Now even if the pattern fails and breaks below that line, then its a fake, but that £6pp Ive got from the bottom so it wont hurt me as bad had I got the full load at £20pp at one price.
Hi Rupert,
If what you're doing is working for you, then far be it for me to criticize. However, (you just knew there was a 'however' coming didn't you!) what you're doing sounds dangerously like averaging down to me (or averaging up in short positions). This is an extremely dangerous game to play - especially in the current volatile and unpredictable market conditions. The one caveat I would add is that if you plan to enter trades in the way that you describe, it may work so long as you keep tabs on your aggregate position and have a stop loss where you get out no matter what. The danger is that your set up appears to be become stronger the more the market moves against you. You're reluctant to get out for a loss because you just know that price will swing back in your favour for a good profit. And, normally, it does just that. But every once in a while, the market behaves irrationally and throws a curve ball and just keeps going and going and going. All the time you're adding, adding adding and then you're praying, praying, praying. Eventually, you just can't stand it anymore and / or you get a margin call. I dare say you're very aware of all these points and have them covered. But I'm posting this as a warning to less experienced traders who may be tempted into trading this way without understanding the risks. And the risks can be huge and the consequences disastrous, as I know to my cost when I blew 70% of my account trading this way on just one day trade.
Tim.
 

Rupert206

Member
78 22
Hi Rupert,
If what you're doing is working for you, then far be it for me to criticize. However, (you just knew there was a 'however' coming didn't you!) what you're doing sounds dangerously like averaging down to me (or averaging up in short positions). This is an extremely dangerous game to play - especially in the current volatile and unpredictable market conditions. The one caveat I would add is that if you plan to enter trades in the way that you describe, it may work so long as you keep tabs on your aggregate position and have a stop loss where you get out no matter what. The danger is that your set up appears to be become stronger the more the market moves against you. You're reluctant to get out for a loss because you just know that price will swing back in your favour for a good profit. And, normally, it does just that. But every once in a while, the market behaves irrationally and throws a curve ball and just keeps going and going and going. All the time you're adding, adding adding and then you're praying, praying, praying. Eventually, you just can't stand it anymore and / or you get a margin call. I dare say you're very aware of all these points and have them covered. But I'm posting this as a warning to less experienced traders who may be tempted into trading this way without understanding the risks. And the risks can be huge and the consequences disastrous, as I know to my cost when I blew 70% of my account trading this way on just one day trade.
Tim.

Hi Tim,

I have my mental stops in already. I used this strategy to basically enter within a specified range. It prevents me from missing a possible setup as there every chance of a breakout/down when its at the top.bottom of a range. But I dont want to enter the full position at the top because chances are i may be early and will be able to pick some up at the bottom of a range.

I trade consolidation patterns mostly, and this straegy works well for me. I have criteria in place that allow me to know when to exit, I will exit in bigger chunks than I built up with. But thats only because I cant close a £30pp in one hit with CMC.

In some case I'll reduce position size, but if ive identified another pattern developing that was in the intended direciton of the original trade then I will keep a smaller loosing position open and see how the new setup pans out If it looks flaky again, then i'll be out, if it looks good then I will re-enter.

So to conclude, im only adding to average into a setup. Im not praying or hoping for it to go in my direction. If im wrong, im out, even if it means on a spike, im out. And soon as the pattern fails the trade is finnished. I dont hold onto losers at all. Doesnt matter if I take a larger hit my being taken out on a spike, if it goes against my criteria, then no excuses the trades closed.

Im a day trader, so I cant afford to make stupid mistakes like holding onto a loosing trade. The DOW will whip you out and skin you alive with the current volitility so it simply not worth the risk.

If im wrong, I exit and wait for the next setup.
 

netranger

Newbie
1 0
Scaling out helps you if you have psychological issues staying in trades but from a business standpoint, it is not what you want to be doing.

Trailing stop is much more effective and allows you to maximize at full size while providing equal risk protection to scaling out. In fact, capturing profit targets at full size reduces risk in and of itself.

Just do the math and it becomes very obvious that you achieve greater returns over time (50% more in most cases - if you have a good strategy). Even if you're scalping.
 
 
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