Trading Basics: Evolution of a Trader

SCALING OUT OF POSITIONS: A PROFITABLE MISTAKE?

Scaling out means selling part of a position to capture profits. A prominent day trader I know recommends selling the first trade of the day as soon as it shows a profit. Why? Because it sets a positive tone for the day. I think he is nuts.

After reviewing my trades, I learned that scaling out did not work for me. When I felt the need to sell, my instincts were right. Selling only part of the position often meant the stock would continue to decline, and I would sell the remainder at lower prices.

My scenario is different from the one the day trader described. His trade was moving up; mine was threatening to tumble. My question to him is this: If a trade is making money, why would you want to sell it? Just because it makes you feel good in a job where emotions should take second place is not a good reason to sell a winner. Selling winners and holding losers is the exact opposite of what traders are supposed to do.

Let us roll out tests to see what the numbers say about scaling out of positions. The following is based on another Howard Bandy article (September 2009).

Like the scaling in approach, I used 571 stocks from January 2004 to November 2008, buying each stock at the start of the month and holding it until either the end of the month or when sold by scaling out or being stopped out. I limited stock prices to a minimum of $2 a share because low priced stocks tend to move erratically, with penny changes meaning large percentage ...