Should you scale out of positions?

Many traders have a favorite method for trading, and they rarely deviate from that plan, regardless of what they are trading.

One method many people like is what I call the “peel off” method.

In its simplest form, the trader starts out with two lots, exits the first at a small profit (the “peel off”), and then holds the second as a “runner,” going for big profits. In some cases when the first lot is exited, the second lot is then modified to have a breakeven stop.

Of course, for every person who uses this method, another person thinks the approach is complete hogwash.

I’m interested in hearing anybody’s experience with using this approach and whether it worked or didn’t work for them.

I am trying my hand at doubling up, not scaling out. The plan is to double the position once unrealised gain on the initial trade reaches 2 x risk. Place the stop for Trade 2 at halfway back to Trade 1’s opening price, move the stop for Trade 1 to the same place. Now you have double the exposure for zero risk.

Repeat for a third trade etc.

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One of the issues involved in scaling out is that it means your position size is at its biggest when the trade starts, which is when you have least information and most risk, and no way of knowing whether it will be a winner or a loser, and at its smallest later on, after it’s already proved to be a successful entry and a good trade.

Which is a pretty funny way of managing your risk, isn’t it? Most risk with the highest stake money and least risk with the lower amount?

Scaling in makes a lot more sense to me than scaling out. That way, you’re adding to winning positions after they’ve already turned out to be good entries (and can do so without increasing risk as Tommor explains in the previous post).

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I’ve thought about this a lot, the thing that troubles me with it is it seems to increase your required win rate a lot.

Hypothetical;

You buy 2 lots, 20 pips stop (net risk 1%) and take profit on 1 lot at 1:1 RR.

You have secured 0.5% and then you breakeven the 1 lot.

If your break even stop hits, you have realised a 2:1 risk:reward.

Assuming the second trade does well and takes a profit for 80 pips, you have gained x4 half risk + 1x half risk = 2.5% for 1% risked.

So, when hitting 1:4 RR, you make 1:2.5 RR and this is in the area of an ideal scenario.

It seems rather inefficient as a pay off for catching such a good move when you’d get the same return on banking 50 pips on the full position.

I wonder how well it would pan out long term when you lose full risk on all losing positions and gain only half risk on many winning positions and have a max pay off coming under 1:3.

This seems like it’d require a fairly high win rate to be overall profitable.

Scaling out means that as the market goes more and more in your direction, you are getting more and more into cash. If it accelerates in your direction, you get out even faster. At the point when you are proven to have been most right, you are least invested.

The idea of this game is to make money.

Scaling out, and moving the stop to b/e without pyramiding, are just scam techniques that some traders and trading experts and most forex account / training course salesmen use to convince the new trader that they can make a profit without risk. In fact, there is no such profit.

The reason you think this is because you don’t consider time to be the most valuable commodity. If the market starts to move sideways you’re going to be holding this position, freezing up capital you could be using on other opportunities. Finally it goes in your favor, what a waste of time. Once you realize time is the most valuable commodity you will have been enlightened and understand what the OP calls the “peel off” method. I call it common sense.

The key to successful trading is aggression.

I think you are right. Everyone should practice scaling of position.

Reason being to lock in SOME profit for the day as part of risk mitigation?

Don’t worry about locking in some profit, worry about 1. not losing capital and 2. making more capital. Locking in a little profit locks out bigger gains.

Scaling in is definitely the way to go in my opinion, even 100 point intra day trends can become 5:1+ reward to risk trades whilst still giving your stops wiggle room

Example;

Usd/jpy is currently trading around 110.15, if you think you have a pretty good idea of the next 100 point move instead of hesitating over the perfect entry get in at market at what you feel is a conservative risk amount, place your stop just beyond support or resistance, for Instance if going short place it a little beyond the previous high of 110.47, so say at 110.55 (40pips) .

Now you might use the break below 110 as your confirmation and double your position and move your stops to maintain your initial risk or breakeven, on the way down to your take profit you may see a 30 or so pip pullback or 2 and take this opportunity to add to your position again at a good price once it resumes downwards, now you’ve hit your take profit at 109.30.

you entered at £4 at 110.15, upped it to £8 at 109.95, again to £12 when the market pulled back 30 points back up to 75. You made £780 profit and your initial risk was only £160.

If you would have waited for the break of 110 and got in at £5 a Point at 109.95 and took profit at 109.30 you would have only made £325 and your stop if you used the same previous high method would be £300, huge difference in Reward to Reward by adding at key levels.

Ideally i would shoot for 200+ pip moves as they can really hit big but you have to be prepared to be wrong a few times, used that as an example as i have the order in already on that one, fingers crossed :slight_smile:

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Sorry, your experience on this site says nothing about you. You glibly speak of 200 pip moves although you seem to interchange pips and points easily.

We need some evidence you actually have a clue what you’re talking about - 200 pip moves are not to be sneezed at !

Ouch that was harsh, search profitforextrader, you’ll see i started posting here in 2009 when i was about 19 and turned my firsg 400 into 30k before blowing all of it of course (martingale never works), then multiple times since to be honest but…9 years laters i’m still trading and have learned a thing or two, take as much of the above as truth as you want :wink:

True, but he’s only giving his opinion, you know? He says so in the first sentence?

That’s my opinion, also, for the record. I’m with Tommor and Charlie, above.

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Ok I see “profitforextrader” :sunglasses:
I have to say this is one of the issues I really struggle with. - Take a few pips by swing trading and concentrate on keeping your capital intact, or multiple losing entries (Or “breakevens” ) - My psychology really finds that incredibly hard to do - and of course it only works in specific market conditions. - However there is a good argument to say that @tommor’s method - WOULD have got you out of “Bitcoin” with minor losses - albeit Multiple times ?

One of the things that really made a difference to the way i trade today is playing poker.

Sounds unrelated to some i’m sure but there are 2 concepts i think apply to both and once you really get them you will see the difference.

The first is only playing your premium hands like big pocket pairs and big suited connectors, etc. And fold anything marginal like K 10off. Same applies to trading, only take what you feel are your highest probability trades and discard anything marginal regardless of how boring it is to wait, patience is key.

Second, if you hit you want to get more and more into the pot but if you miss you want to fold quick, folding 3 or 4 times shouldnt be a problem if you know your top hands will pay you off enough to cover those and then some. Same applies to trading, you should be able to close out at a small loss multiple times without it affecting your trading decsions, if you cant you are risking too much or just need to get out of the “never want to lose a trade mentality” like many traders have initially hence the popularity of martingale type systems and believe me whether you use a R:R of 1:1 and double up or 3:1 and only add a percentage each time it will still come crumbling down at some point.

Ok lets take a look at your poker strategy - Now I assume you are talking No Limit Holdem - Tournament play here.

Lets look at the best hand of all AA - The only time you really know where you are (winning) is before the flop. Say the flop comes 3,5 hearts 7 spades and you have "limped in " for a flat call - what do you bet now ? or do you even call a 3 x bet ?

Surely the right thing to do is to go “All in” before the flop, when you know where you stand, and hope for a single caller, or to pick up the blinds without risk.

All in pre-flop with pocket aces is only always +ev if you expect to get called, if you are lucky enough to have position too then you have the benefit of all the information before you have to act, i would never shove without going through 3 and 4 bets first as to not scare them off unless there were 5+ callers and i dont want to get sucked out by 46 suited. I would probably hit a pot size bet every street heads up and 1/2 or 2/3 with 2 or more callers to get as much as possible in the pot.

Point is you can add more £££ once you have more information and your chances have improved either by a market move in your direction or hitting trips on the flop.

Another important point is there is always a part of me that expects to lose even with pocket aces, sometimes 3 or 4 times in a row.

I now feel this poker analogy has gone a little too far…but i hope some of you got the initial two points i was trying to make :grin::+1:

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AA and KK play very well, overall, against 1-2 opponents but not nearly so well against a full table with its additional risk that others can improve, so it’s appropriate to raise big, pre-flop, with these cards, to drive out several opponents and deprive them of their chance to improve.

Cards like 98-suited play much better, overall, against a full table: they improve enough to win the pot only occasionally and therefore need many opponents and a big pot to justify their risk-capital/playing-cost.

Maybe so. It’s an imperfect analogy, but aren’t they all? I got your points and agree,

You sit with bare aces against 2 or more callers and want to get an increasing amount in the pot on every street ??

A recipe for losing your shirt - if I ever saw one !

Nope 2 or more callers - I’m ready to become cautious - even to fold if I haven’t hit – which is why I want to get it all in the pot whilst I still DO KNOW exactly where I stand ie Before the flop.

Anyone who calls me at that stage is an underdog but I only want one because if I get more than one - I am the underdog !

After the flop - who knows where the best hand lies - each successive card adds another layer of uncertainty and more chances for my hand to fail. - Just like every new bar gives an opportunity for a big reversal.

If I have a “decent hand” like 9,10 suited, I want to see more “bars” to give myself a chance to become involved in a trend, but with a “Big hand” like A,A (say a successful rejection of price at a big support / resitsance level) I want to get a decent bet on and scale out of it as the likelihood increases that it will turn and come back for the retest.

[Edit - perhaps what I seem to be saying is that there are times for scaling out (and possibly for scaling IN ! ) - dependent on what type of price action you expect to see ? ]

I would agree with you if you are talking online, 2/5 live is a different beast, you are always getting called down multiway with middle pairs so pocket aces are usually good until the river but of course you have to pay attention to board textures and peoples betting patterns, etc. Same as you have to pay attention to price action.

I used to be very strict with my initial sizing and stops and take profits, try to work everything out very statistically but after awhile i realised being flexible is far more important, moving in and out of partial positions along with pullbacks around significant levels, etc. Can make a huge different to profits.

I am also a fan of scaling out of some of your position when you feek like the momentum is running out in the short term but you expect the trend to continue after a short pullback, exit some of your position and then get back in with more lots at a better price. Always at the risk of misjudging it and it continues to run away with a reduced position size.

I agree with your statement about aggression but i think its possible to tone it up and down to suit the market for better profit margins.