Scale up vs Scale out

Trader's Mindset

Jun 06

We will explore a simple concept in trading: scale up or scale out. Scaling up tends to be the preferred technique for the discretionary day trader. The idea is to get really good at trading one market and then increase size. Futures markets are ideal for scaling up. On the other hand, scale out tends to be associated with the systematic or quantitative trader: the idea is to have multiple uncorrelated systems trading on multiple time frames and markets.

What are some good reasons to scale up? First, some traders have a very strong ability to predict the markets and enjoy the process of trading. The basic objective is one (1) either to be able to consistently scalp out a small profit from the market most days — call it the small bet approach — or two (2) to be able to identify a couple high probability trades per day and trade them with larger size. One of the basic principles of scaling up is the realization that most trading systems don’t have a very large edge anyway, and if you learn to “read” the market then you can find many times in the market where it seems more likely to do one thing as another. One of the best realizations for the active trader is the realization that they don’t need for the market to hit a faraway target: they just need to be able to take a small profit with larger size, high probability, or a good risk to reward. More over because trading systems are selective, they tend to need to trade more during exceptional conditions and because there are fewer opportunities, there is a need to take more risk on those rare opportunities. Of course, most traders tend to require at least a minimum level of volatility. Beyond those considerations, it takes more capital to deploy several futures systems, and the risk of a broken system or even a technical mishap is high.

On the other hand, scale out offers many unique advantages. The scale out trader who has multiple systems can keep the size very low per trade and take advantage of diversification. While the discretionary trader may be more sure they have a realistic model, the parameters of that model aren’t well known. The system trader may not have as realistic models but they can be more certain of the parameters to trade them. Scale out traders also can deploy more capital. The system trader can, also, have systems watching the markets and trading 24 hours per day which yields greater opportunity then a one or two market trader can achieve.

Both approaches have their merits. However, scaling up might be better suited for the small discretionary trader because of reduced capital needs. On the other hand, scale out traders are better diversified and probably weather changing market environments better. Even better, there is no restriction on trading the best proven systems on a systematic or automated basis while still deploying graybox technologies for the purposes of scaling up.

About the Author

Curtis is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact him at