SCOTT WELSH TRADING BLOG

The Trick Used By The Best Traders

The Trick Used By The Best Traders

Apr. 24, 2019

When studying the methods of the most famous traders, we find that many of them use the same trick.

These famous traders have best-selling books and popular seminars, and get invited to weekends on Necker Island. So it might be a good idea to listen to them.

What’s the trick?

They scale out of their trades.

They take some of their position off at one target, and then let the rest of the position ramble on for more profit. This way, we get some profit locked in while keeping our unlimited profit potential alive.

It makes sense–and it feels good. Few things feel better than getting into profit and taking some money off the table.

There’s only one problem: I’ve never found it to be mathematically viable.

I’ve been studying automated systems since 2012, and I’ve built some scale-out systems during that period. And every time the scale-out robots weren’t as profitable as the “normal” ones.

It felt good psychologically, but it never added up to more profit.

So I never pursued it further.

Until now.

Just recently, I had a scale-out feature built into a robot. I wanted to test it once again with fresh eyes.

Even more, I wanted to test scaling out on a new platform. Before, I had robots built for Tradestation, and those only scaled out at the close of the bar. The robot we’re talking about today scales out immediately after hitting the target.

A part of me thought this wouldn’t make a difference while another part made me wonder if I had been wrong all this time. Maybe the famous traders were right after all, and I was foolish not to pursue a scale-out robot that got out immediately.

So this week, we’re going to use the best currency pair to trade, the EURUSD, and we’re going to look at scaling out.

Here are the details:

  • System: The RSI System With the Scale-Out Trick
  • Philosophy Behind It: A basic system can be made better with a scaling-out exit strategy.
  • Need Special Indicators? No, just special money management.
  • Chart: Daily
  • Instrument: Forex EURUSD
  • Long or Short? Both
  • Long Entry: 1) Price must be above the 92 SMA; 2) Price must close into RSI Oversold (8); 3) Enter at Open of the next bar
  • Short Entry:1) Price must be below the 92 SMA; 2) Price must close into RSI Overbought (2); 3) Enter at Open of the next bar
  • Stop Loss: 480 pips
  • Take Profit #1: 30 pips
  • Take Profit #2: 60 pips
  • Move to Break-Even: none
  • Trade size: 1.0 lots
  • Hypothetical Profit: $49,514 (no compounding)
  • Hypothetical Max Drawdown: $4,952 (10.6%)
  • Hypothetical account size: $10,000
  • Test Period: 2003-2019
  • Number of Trades: 414

See the MT4 Performance Report here.

The first thing I notice is the nice profit to max drawdown ratio. We make almost $10 for every dollar of max drawdown. That’s really good.

Second, we’re getting a lot of trades. Granted, the scaling-out is the cause for some of that, but we are getting some action unlike some of the long-term systems we’ve looked at.

Third, the win percentage is through the roof (over 90%).

Fourth, the stoploss is very large compared to the profit targets. That’s how we get such a high win rate. However, this is an emergency stop. It won’t get hit very often. In fact, the average loss is only 3.76 times bigger than the average win. Combining that with a very high win percentage gives us a nice mix.

Last, this system hasn’t had a losing year since 2007. And when it did have a losing year, the loss was very small.

Maybe the famous traders are right. Maybe scaling out is the best way to even out drawdowns and keep the profits coming in. It sure looks that way on first glance.

We’ll take a further look at this system in our next email. I feel like there’s a lot to talk about.

Until then.

 

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.