My current scaling out strategy
Instead of using units of 4 contracts as Renato recommends, my current trade management of scaling out usually involves starting with 2 contracts, exiting 1 car at +1.50, and letting the other run after bringing up the stop loss to +.25.
As you could imagine, nearly most of the time the 2nd car is stopped out at breakeven. So from the pure mathematical perspective, unless you occasionally have a monster runner, the #'s just don't seem to add up for the scaling out method I use.
The reason to dig deeper? Because I had to climb so far
My gross profit on Friday was $50, and that's after going into aggressive scalp mode about 1.5 hours before the close and climbing myself out of a $600 loss on 12 trades. That type of P&L curve doesn't sit well with me so it was time to do some further analysis.
One point was clear, I was not patient enough and entered some non-strategy (i.e. rogue) trades that contributed to the drawdown. That was was got me into trouble for most of the day. But there was also something about my scaling out strategy that I wanted to explore.
The what-if scenario I modeled
"What if I did NOT scale out and instead, simply exited my entire position at +1.50 when the 1st target was hit?"
Here are the results
Instead of ending Friday with +1.00 gross, I would have had an incremental:
- +13.75 if I used this method the entire day
- +9.25 if I used this method only during the final 1.5 hours of aggressive scalping
During the final 1.5 hours, the range of the ES was about 6.50 points, so these results are difficult for me to believe (but remember, they're simply based on the actual executions I took from scaling out of the 1st contract).
What's also interesting is that when the trades were profitable, nearly all took only 1-3 ticks of heat. So there's a possibility that the stop loss could be tightened up -- however, this requires further research and a much bigger sample size.
But can it be replicated?
A part of me wonders whether the aggressive scalping performance was due to luck and therefore, can not be consistently replicated in the future. On the other hand, I have enough evidence over the past 3 weeks to believe that this type of performance can be more than possible.
The real challenge is whether I or anyone can have the mental stamina to maintain this rapid-fire method of trading both intraday, as well as over days/weeks/months/quarters/years. It's difficult being a human trying to keep up with the HFT algo-bots!
The bottom line
Renato mentioned this in his chatroom last week, and the bottom line is that you really need to be able to enter a trade with the appropriate number of contracts to effectively scale out. So if you can't enter with at least 4 contracts, then you need to chip away and build up your account so that you can. And only then can you take advantage of the powerful benefits that scaling out can offer.
Therefore, my new strategy starting this week will be to exit out of my entire position at +1.50 or +2.00, based on market conditions. No more scaling out, since I will not likely be using that method when I start trading live.