Scaling In And Out Of Positions


If any trader is sure the next deal will be a winner, he will use all his capital to enter this transaction, but because trading is based on the probabilities, it is impossible to say whether the next position will be a winner or loss, so professional traders use small trading volumes at the beginning of the deal and the more confident they will be in the success of this trade, they decide to buy more contracts or shares to increase the expected profits and take advantage of the validity of their expectation. The trader sells some quantities to book some of the profits and reduce the risk. This method is widespread among professional traders, especially what is known as Trend Following Trader.


What are scale-in and scale-out?

Scaling in trade means opening a position with a fraction of the capital you intended for yourself to enter more positions when the trade moves in your favor. Institutions like mutual funds have to scale into and out of positions constantly because they receive new money and requests for redemptions every day. Individual traders commonly use scaling in when they enter in the direction of the trend during a pullback and when prices move higher in the trend direction to improve their dollar cost average. And scaling out means that when you exit, you exit only part of your position and look to exit the rest later. More traders are willing to scale out than are willing to scale in; in fact, many traders regularly scale out of trades.


Should Trader scale in positions?

Scaling in is just an option, you can choose not to use it if you don’t want to, but it has several considerable advantages, which make its utilization useful. First, you reduce the total risk of your trade. By scaling in you commit with only a fraction of your funds upon entry in the long position. instead of going long with one standard lot, you can enter a position by committing yourself with a fifth of it or two mini lots by doing so, you risk losing a lot less money if the price turns against you in the beginning. If the trade however moves in the desired direction, you can add to the position This, of course, means that you would profit less, compared to if you entered with the full standard lot, but it also means you would have lost less, if prices had turned against you. Second, scaling in allows you to choose the best entry point for your trade. It is quite possible that your analysis of the current market situation is correct, but you haven’t chosen the most suitable level to enter a position. Scaling in gives you more time to assess the situation. Very often you will have 2 or 3 favorable entry levels and sometimes the area is not a precise price but rather a range, especially on hourly and bigger time frames. This is why scaling in allows you to enter a trade even if you’ve missed the perfect entry-level and still manage to achieve profits.


How to Scale into Winning Trades?

First, identify your ideal position size for each trade, you should not risk more than 1% to 3% of your portfolio in one trade. If your ideal position size is three standard lots use one lot at a time for every buy signal as shown in figure 1. First, buy signal with one standard lot when the price breaks out the neckline of the inverted head and shoulders. Second buy signal with another standard lot when price breaks above the resistance level to confirm trend continuation opportunity. Third, buy signal with the final standard lot when the price bounces up from a support level now trader has a full position running.

Three standard lots on the chart

Figure 1


Disadvantages of scaling into trades

However, it is worth considering that scaling into a trade also has certain disadvantages, which is the reason why not everyone is using it. The main downside of this strategy is that you will always have the largest position at the final phase of the trend or before a large correction, which could be devastating for your account if a sudden price reversal occurs and you haven’t limited losses through protective stops.


Should Traders scale-out from positions?

Scaling out of a trade is used for achieving similar goals as scaling in risk reduction, locking in profits, limit losses. Scaling out means selling a fraction of your total exposure after your position has become profitable, thus locking in some profit, while leaving other positions open in order to benefit, if prices continue to advance. This strategy allows the investor to take profits while the price is increasing, rather than trying to time the peak price. If the actual value continues to increase, however, the investor could be selling a winner too early.


How to Scale-out Winning Trades?

The main goal of using this technique is to stay with the profit and avoid a loss situation as much as possible. If you have a winning position of three standard lots you can use any trailing method or exit strategy to close a portion of your positions as the price moves upward. In figure 2 we use RSI Oscillator to exit the first and second standard lots when the indicator cross below the overbought area below level 70 which means downward correction may occur then exit the last standard lot when the price breaks below the support level.

Close a portion of your positions

Figure 2


Disadvantages of scaling out trades

A negative aspect of scaling out worth mentioning, which especially novice traders find disturbing, is a market that continues to move in your direction and even speeds up significantly after your initial exit. This might upset new traders but if this happens search for new good entries in the direction of the trend and always remembers you cannot get benefit from every price movement.


Should I scale into a losing position?

As you can see, the idea of scaling in or pyramiding can be an extremely profitable way to maximize profits. However, it only works with winning trades. Sure, you might get lucky and come out ahead by adding to a losing position, but the odds aren’t in your favor. You want to compound winning trades, not losing ones. The latter will only serve to eat away at your trading account that much faster.

The content published above has been prepared by CFI for informational purposes only and should not be considered investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.