Micahel Taylor has posted the follow-up to his post about (not) scaling into trades. This one looks at scaling out of trades:
In part I, I mentioned how scaling into trades ends up increasing the complexity of your system while reducing the edge and thus your profitability. Now, on to scaling out of trades.
Scaling out of trades is pure magic. Yes, magic. The more I think about scaling out of trades…the more I realize how powerful this technique is to your system. Think of it this way. Scaling out of your trades gives you the chance to create trading systems that are 100% profitable. How in the world can you beat that? [read the entire article…]
As you know I’ve been working to get better at taking partial profits on my trades. I found a method that works for me. As soon as I enter a trade the first thing I do is set my stop loss and then I immediately set an alert which will tell me to sell half of my position when the position reaches a certain percentage gain. That’s been working very well for me so far. It seems that about half the time my first sale is better than the final sale. I can live with that and I no longer fret about not maximizing the gains on the entire original position. Being able to lock in a decent gain and then guarantee yourself at least a small profit on the remaining shares makes trading a lot less stressful.
Michael lists some other tenets of scaling out of trades, namely “a way to lock in your profits, free up your money quicker, let some profits ride, reduce your system drawdown, and increase your win ratio to boot.” Good stuff, and a must-read article.