Profit taking/money management methodologies

Hi everyone,

I just wanted to open up a discussion on a particular profit taking/money management technique. I know some of the resident experts here, like Pipcrawler, make use of this technique

The technique i’m referring to is scaling out of your trades at different profit levels.

I have read much for and against this technique and i would very much like to hear what everyone here thinks. Experts…feel free to chime in :slight_smile:

I’m sure many of us here have read Van Tharp’s work and he is one who is dead set against scaling out. His reasoning is that when you take your losses, you are often taking them with your entire position but you are only taking your biggest winners with only some of your positions. He contends that if you run the numbers and compare your trades using this technique vs. hodling your entire position, you would be surprised to see how “dangerous” (to use his word) this trading is.

Other expert traders like Kathy Lien, Boris Schlossberg, Mark Douglas (Trading in the Zone) and would disagree for a variety of other reasons.

I think they would argue that it eases the psychological effort of holding trades if you know that you’ve taken some profits off the table, thus making it easier to let the rest of the trade ride. Mark Douglas’s book makes mention of this as well.

Tharp does not mention that in taking part profits, you will have also essentially reduced the number of contracts participating in a loss as well, should it reverse against you.

My own personal opinion is that you have to look at this methodology in context of your system as a whole (accuracy, avg win, avg loss, etc…). Although on the surface it may seem to negatively affect your risk:reward, it can also assist in dampening losses should the market reverse after you take initial profit. Bottom line: If your r:r is still at a reasonable level, then i think it is worthwhile to pursue this, especially if you normally have a hard time letting trades ride.

Looking forward to all of your various viewpoints

i can acutally understand the arguements on both sides of weither scaling profits is a good or bad move.

like you said, it depend on your stratagy. i personally dont like using this method unless im scaling entry positions. for instance if i buy at one level and the price drops but there is another good opportunity to buy again then i will do so at the lower price while holding on to my previouse position( as long as my previouse position doesnt hit its stop loss). at this point i like to use scaling to get out of both. i prefer to get out of the higher position first and i then find another exit higher up for my lowest postion. i also like to eventually be able to use my lower exit as a stop loss for my last position.

i personally feel unconfortable buying more then one lot at the same entry point then scaling profits. dont you sort of end up with a lower reward/risk ratio with this method then if you open and close everything at the same spots? then there is a question of what happens if your one exit postion doesnt hit? well, in this case i can understand why scaling is a good option cause a trailing stop cant protect profits as well as placing good targets.

if you i had to do this technique then i would really consider trailing my stops a bit more closely then i would normally do but thats just me. rather then do this techique i just get out of a trade and look for a new opportunity to get back in and capture more profits that way.

i dont know. im just too chicken to use a scaling profit technique for the reasons Van Tharp’s have. its a smarter way to go then to always expect to gain profits at your highest target or missing out on major gains by clocking at at your lowest profit taking level . what you do really depend heavily on your trading system and personal preference.