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As far as I know there is only one reason to scale into (or out of) a
trade. If you are trading big enough size the market may not be
liquid enough to accomodate a big order without significant effect on
the execution price. Along the same lines, if your trade position is
of interest to others it is easier to hide your activity by spreading
out orders over time and over brokers.
Aside from such considerations, there is no "mathematical" reason to
scale in or out of trades. The simple fact is that your system
should be designed to make the best trades - i.e. to buy or sell at
the price which offers the greatest expected profit given the
information available at the time.
To take your example, either the trade at 890 is the best trade or
the trade at 895 is the best trade. Why short 890's if the average
profit achieved by waiting for 895 is greater? (Here I am including
the cost of "lost profits" which arises if 895 is never hit when
calculating average profit). Similarly, why short 895 if the average
result of shorting 890 is better?
One aspect of this is the phenomenon you mention, namely always being
short 2 contracts when you are wrong and sometimes only 1 when you
are right - not a good betting strategy!
I would be very suspicious of any system which prescribes scale
entries - it smacks of something which has not been tested very well.
Carl
--- In realtraders@xxxx, "Sean Cassidy" <scassidy@xxxx> wrote:
> In trying to reason through this....I would like some comments.
Lets say the market is at 880 on the S&P and i want to go short at
890 and 895. One at the low end and another at the high end. Doesnt
that mean that all of my losers will be for 2 contracts and several
of my winners will only be for 1 contract. Fowllowing that....it
would then seem that if I had twice as many winners as losers I would
only break even, assuming a 10 point stop and profit target.
>
> I am having a discussion with someone about this and would like
some feedback....although it seems obvious that with this method a 67
5 win rate breaks even....before commissions.
>
> An example
>
> 12 trades
>
> 8 winners at 10 pts 80 pts
>
> 4 losers at 10 pts but on 2 contracts -80 pts
>
> Total 0 pts
>
> Sean
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