Scaling in and Out Of Positions
What is “scaling” and why would you use it?
- Scaling in doesn’t mean weighing yourself before, during, and after a trade (although it doesn’t hurt to monitor that too!).
- Scaling means adding or removing units from your original open position.
- Scaling can help you to adjust your overall risk, lock in profits, or maximize your profit potential.
Of course, when you add or remove from your position, there are potential downsides to be aware of as well.
Benefits of Scaling
The biggest benefit is a psychological one.
Scaling in and out of your position takes away the need to be perfect in your entry or exit.
Scaling In And Out Of Positions In Forex
No one can consistently predict price action or the exact turning point of a market.
It’s way too difficult to keep expecting to get the best entry possible all the time. You are setting yourself up for a lot of heartache.
The best we can do is identify an “area” of potential support/resistance, reversal, momentum change, breakout, etc.
You can enter your position in bits and pieces around those areas and/or take your trade-off at different levels to lock in profits.
Properly executed with a trailing stop, scaling out of winning positions can help you protect your profits just in case the price suddenly reverses.
Finally, if you add more to your open position, and the market continues to go your way, your bigger position size will increase the amount you will make for every pip.
Drawbacks of Scaling
The major drawback of scaling is when you add more to your position. Can anyone guess what that drawback is?
You got it….YOU INCREASE YOUR OVERALL RISK!!
Remember, traders are “risk managers” first, and if done incorrectly, “scaling in” can wipe out your account!!
Lucky for you, we’ll explain how to SAFELY add to an open position.
The second drawback is when you remove portions of your open position, you reduce your maximum potential profit. Who wants to do that?
Well, in markets as fast and dynamic as the foreign exchange market, it may benefit you to reduce your risk and “take some off the table.”
Scale out of Positions
scaling out has the obvious benefit of reducing your risk as you are taking away exposure to the market…whether you are in a winning or losing position.
When used with trailing stops, there is also the benefit of locking in profits and creating a “nearly” risk-free trade.
Remember, there is the possibility of the market moving beyond your profit target and adding more bling-bling to your account.
There’s always much to consider when adjusting trades, and with practice over many trades, you’ll find a process of taking off trades most comfortable for you. Next up, we’ll teach you how to scale into positions.
You may be asking, “Why? Why would I wanna scale into a trade?”
Scaling into positions, if done correctly, will give you the benefit of increasing your maximum profit.
But as they say, “Higher reward means higher risk.”
If done incorrectly, the value of your account could drop faster than you can even think about clicking the close button on your trade.
Before you know it, you’ll be staring at your computer screen, eyes wide open watching your account get margin called.
Scale in Positions
Adding more units to a” losing” position is tricky business and in our view, it pretty much should never, ever be done by a new trader.
If your trade is a loser, then why add more and lose more??? Doesn’t make any sense right?
Now we say “pretty much” because if you can add to a losing position, and if the combination of risk of your original position and the risk of your new position stays within your risk comfort level, then it is okay to do so.
To make this happen, a certain set of rules has to be followed to make this trade adjustment safe. Here are the rules:
A stop loss is necessary and MUST be followed.
The levels of position entry must be pre-planned before the trade is put on.
Position sizes must be pre-calculated and the total risk of the combined positions is still within your risk comfort level.
Determine Trade Invalidation Point (Stop Loss)
Let’s determine our stop level. For simplicity, let’s say you pick 1.3100 as the level that signals you were wrong and that the market will continue higher.
That is where you exit your trade.
Determine Entry Level(s)
Second, let’s determine our entry levels. There was support/resistance at both 1.2900 and 1.3000, so you’ll add positions there.
There was support/resistance at both 1.2900 and 1.3000, so you’ll add positions there.
Determine Position Size(s)
Third, we will calculate the correct position sizes to stay within the comfortable risk level.
Let’s say you have a $5,000 account and you only want to risk 2%. That means you are comfortable risking $100 ($5,000 account balance x 0.02 risk) on this trade.