To Scale or Not to Scale?

In ‘Scale Fish not Trades‘ Michael Taylor discusses why scaling into positions is not a good idea:

I have tested and retested scaling into trades in all my systems. And on every system I have created…scaling into a trade produced mixed results. Not one garnered better results than the original non-scaling method.

In response to Michael’s post, Jon ‘Fickle Trader’ Tait explains why he scales into positions:

Part of the reason I like using 3 buy points is that I see it as an alternative form of volatility based-position sizing. Rather than basing position size solely on the historic price volatility, the 3 buy-points base position size on the stock’s potential drawdown while still remaining healthy at any given point in time during an advance.

Comments

  1. Posted by Duru on July 23, 2005 at 11:56 pm

    In “The Probability of Fortune” Moshe Milevsky weighs in on this debate with a statistical analysis of the wisdom of dollar cost averaging (DCA). On page 47, he concludes: “…one must realize that from a conceptual perspective, dollar-cost averaging is simply an inefficient financial strategy. If you have a lump sum of money that you eventually would like to invest completely in the stock market, you are far better off investing it all right now…Replacing one major gamble (the lump sum) with many smaller gambles (DCA) does not make prudent financial sense.” Anyone interested in this kind of stuff, I highly recommend this book for its easy-to-understand mathematical analyses of common financial concepts.