Scaling In and Out

May 17, 2013
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Error, group does not exist! Check your syntax! (ID: 22)“I believe in this scenario very strongly — but if the price action fails to confirm my expectations, will I be hugely long? No, I’m going to be flat and buying a little bit on the dips. You have to trade at a size such that if you’re not exactly right in your timing, you won’t be blown out of your position. My approach is to build to a larger size as the market is going my way. I don’t put on a trade by saying, “My God, this is the level; the market is taking off right from here.” I am definitely a scale-in type of trader. I do the same thing getting out of positions. I don’t say, “Fine, I’ve made enough money. This is it. I’m out.” Instead, I start to lighten up as I see the fundamentals or price action changing.”

– Bill Lipschutz (via New Market Wizards)

JS Comment:

Sometimes there really is a “market taking off” inflection point, depending on a combination of catalysts, technical levels and tipping point news events. But in other instances the Lipschutz approach — building a position incrementally, cashing out incrementally — can be a superior strategy.

Do you ever scale into your positions, e.g. put on small amounts and then add as conviction levels increase? How about on the exits? Have you ever thought about it?

(The specific mechanics of scaling in and out — which go hand in hand with pyramiding technique — are an example of what we’ll cover in great depth in the MT Driver’s Manual.)

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3 Responses to Scaling In and Out

  1. David Ayer on May 18, 2013 at 11:40 am

    It depends on the “speed” of the system. With a slow system, such as a long-term trend-following system off of a weekly bars setup, scaling in definitely. Scaling out at profit targets is one tool but hitting a trailing stop or a pattern exit signal may trigger a full exit.

    At the other end of the speed spectrum, let’s say a momentum day trade off of a daily bars momentum setup, I will put the full position on. These trades can be ridiculously volatile and a sizable profit can appear in seconds but also disappear just as rapidly. So quickly tightening a trailing stop or exiting altogether is often better than scaling out.

    I also swing trade (mainly mean reversion with full in, scale out) so I am looking forwards to your treatment of scaling in that context.

    • Jack Sparrow on May 18, 2013 at 8:18 pm

      As a caveat, I would say scaling works better in general with discretionary approaches that incorporate fundamental. But it can work mechanically and we know a very successful daytrader who scales.

      • David Ayer on May 19, 2013 at 11:13 am

        Been leaning towards mechanical since you can also do a number of things you can’t do on TS with manual ordering (e.g. an adaptive trailing stop). But there are issues – for example, run the Strategy on a tick or 1 min chart, but how to best incorporate sizing and stop loss data derived from Atrs on daily bars.

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