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peterB

Why scaling out properly is important

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Hello fellow members!

Yesterday i had some discussion with a friend and i tried to explain him some trading basics and we came to a point when i needed to explain to him why the scaling out properly plays an important part in the whole mechanism and can make the difference between a GREEN and a RED trader in long term.

So here i am providing it to you for further discussion.

Lets say we do 5 trades of a stock which costs $100 and we take 100 shares with the stop loss on $99.5 and possible target on $101 and above. So a 1/2 Risk/Reward.

Here are some example set of trades you do, the first one being a 1R loss, just to make it more visible and make the point

1696087900_ScreenShot2019-08-04at17_37_06.png.a9e260d7cda74aa9475f6ccde2c19c6c.png

So you do various methods of scaling out and make $300, while risking $250. At least you are green! Right?

 

Now lets take into consideration some bad or good habbits. If you do it once, then you do it twice...

835069484_ScreenShot2019-08-04at17_37_32.png.437dc795523bdbb6c205e0b094f5e5bb.png

You would think that things will get much better if you start scaling out on 1R at least but still the risk and reward turns out to be 1:1 in total.

 

So you start to scale out according to the trade plan - by reaching the 2R

1426219241_ScreenShot2019-08-04at17_37_26.png.a145284b983a9eaafb2b3cb417b48b2b.png

Things change dramatically in your favor if you start to do the right thing and trade the plan

 

 

And this is the case some traders tend to do - take some profit at least to be safe...

1428242334_ScreenShot2019-08-04at17_37_19.png.780d575f991f708bcadfac148d6fbbed.png

As you can see, it has no ratio to do this and even with 80% accuracy of your trades you do not get the scale on your side. So just do it right! 🙂

The above examples counted with 4 of 5 trades to be green which is 80% accuracy and that is quite unrealistic. If you count it with 3 RED trades, the numbers are even worse!

See below

901869955_ScreenShot2019-08-04at17_52_46.png.c47c8d2fb0778fdc87dc4165df25b67a.png

And the requirement of scaling out properly to keep the green numbers is even more obvious! Even 3 RED vs 2 GREEN  (40% accuracy) makes you a profitable trader.

 

If you struggle with it, ask your self: Why can you wait for the stop loss of 1R and not the profit of 2R (at least) you planned in your trade?

I hope this helps to understand someone the importance of scaling out properly and not too soon.

Now go to see your trading journal and see what you did 🙂

 

cheers

PeterB

 

Edited by peterB
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Thanks for posting this. I used to scale out before reaching 2R and now i only take 50% off when i reach 2Rs and then scale when I reach an additional R, similar to what Kurt and Aiman do.

The reason I was scaling out earlier than 2R is because I was taking too big of a size, I am now risking 1/3 of my max loss in every trade and looking for opportunities with 3:1. 

The only times I get out before my stop loss or profit target are when the stock is not moving, the tape gets slow or it gets choppy and i feel i am not using my time wisely.

Scaling out at 2Rs is important as you will be able to:
1) take smaller size
2) git it more room on stop loss
3) make more money

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