START – Scaling In & Out

What is scaling?

Scaling is a method of trade management that allows you to reduce potential losses and maximise potential profits, despite the fact that the future price movement in the market is unknown. There are two types of scaling: scaling in and scaling out.

Scaling in

Scaling into a trade means that when you enter the market, you initially enter just a fraction of the total position that you intend to trade and then observe how this initial market entry develops. If the trade works out as intended, then you can enter further positions in the market and take advantage of the price moving in your favour. The following chart demonstrates an example of multiple entries as the uptrend develops.

The first position is entered when the market has shown a clear trend to the upside. A second position is entered after a pull back in the market and then started to continue on in the original direction. As the trade continues to go well, a third position is entered after a second pull back.

The benefits of scaling in

Let’s say that you wished to enter into the above trade with a standard lot. The trade will either win or lose, however by entering just a fraction of the standard lot, you reduce the total risk. By breaking down this position into mini lots and only initially risking, say, 5 mini lots (half a standard lot) on the first entry, you will lose much less if the trade does not work out compared to if you entered with a full standard lot.

If the trade starts to go in your favour, such as the example shown above, then you can add to the position – for example, another 3 mini lots. If the trade continues to go well, as above, then you can enter two more mini lots. Scaling in can be beneficial because you can add to your position as the trade goes in your favour, but if it turns against you immediately, you only lose a small amount of your capital.

Without scaling into the trade, you would enter the market with your entire position (in this case a full lot) which means that more would rest on your judgement of the trade being correct. You can also add more than just the intended amount. Let’s say that the trade is successful and the initial position that you entered is now in profit. If you bring your stop loss up to the initial entry point, then you have taken any risk you had out of the market. This means that you can continue to increase the position size and keep adding to the winning trade beyond the amount that you initially intended to enter.

The risks of scaling in

The most prominent risk of scaling into a trade is that it can increase the overall exposure of your account, which is why it is essential to apply appropriate money management, that means only risking 1-2% of your trading capital on a single trade. The risk of scaling out is that if the trade reverses against you, the more positions you have open, the more you can potentially lose. Always apply sound money management when scaling out.

Even if the market is trending in your favour, there is always a danger of the trade reversing against you and the more positions you have open, the more you can potentially lose. Also, as you enter positions while the trend develops, the later positions that you enter with may be closer to the end of the trend. It is advisable to be cautious when you are getting into a trend that has already been established for a while, as demonstrated in the chart below.

Scaling out of trades

The chart above shows a winning trade was scaled out as part of the position was taken off at each stage of the upward move. The first exit was taken out of the market once the initial move upward had finished, leaving two further positions to take advantage of the continued upward trend.

This technique reduces your overall profit, because, of course, you would have made more if you had left the entire position open for the duration of the entire upward move. However, scaling out protects the profit you have. For scaling out to work well, the market needs to be trending.

Advanced scaling in

Advanced scaling in is a technique where traders enter a position in stages while the price is actually moving against the direction of their trade. Advanced scaling in is a technique whereby traders enter a position in stages while the price is moving against the direction of their trade. It helps you achieve a better average entry price for your overall trade. It can help you take advantage of so-called retracements.

The idea is that by entering the market several times when the price is pulling back from a trend, you can achieve a better average entry price for your overall trade. Note that advanced scaling in is very different from the standard scaling in technique, which sees traders increase their positions as a trade moves in their favour. This technique is not recommended for beginners.

Identifying retracements

To use advanced scaling in, you first need to be able to identify retracements in price, as it is during these that you will place your mini-trades. The image below shows what a retracement looks like on a chart while a market is trending in an overall upwards direction. You should note that to use advanced scaling in, you would be looking at just one of the highlighted areas.

To identify retracements in a downward trending market, look for areas where the price lifts slightly before continuing its downward swing.

Trading with advanced scaling in

To use advanced scaling in, start by entering a trade using just a small portion of the money you ultimately want to trade with. If the price moves in the opposite direction to your trade and you believe it to be a temporary retracement, place another small trade in the same direction as your original position.

Then, if the price moves in the opposite direction to the one you were hoping for and you believe this to be a temporary retracement, add to your first trade with another modest-sized trade in the same direction. This gives you a better average position in the market once the price eventually changes direction and the trade goes in your favour.

The image below gives an example of advanced scaling in during a long (buy) trade:

As you can see, after the trade is entered, the price reverses and drops. This pushes the original position into a loss. At this point, the trader enters a new long position and continues to do so several times at pre-determined intervals as the price moves against the trade.

Scaling into a short trade

The image below gives an example of advanced scaling during a short (sell) trade:

In this example, the price once again moves against the initial entry point, allowing the trader to open a second position in the same direction as the first trade. This gives a much better entry point for a sell trade before the price continues on its downward course.

Initial aggressive and conservative entries

If the initial entry is larger than subsequent entries, it is known as an aggressive entry. It is higher risk but also offers higher potential reward. You enter your largest position as the initial entry and then for further entries you scale the position down in size.

The reason why this is called aggressive, is because at the time of entry, you do not yet know if the price will go in your favour or not – you may not know at this point if you will be using advanced scaling in or the usual method of scaling in. For this reason, it is aggressive because you enter your highest position first without knowing how the price will develop. A conservative initial entry is when each position is of equal size.

Considerations using advanced scaling

You must note that in order to use advanced scaling, you must have a significant reason to believe the market will continue on in the original direction. Advanced scaling in should not be used in a non-trending environment, when prices are choppy or ranging and do not move in any clear direction. Advanced scaling in should only be used when you have a strong reason to believe that a price will ultimately move in the direction of your trade. Only use it in trending markets.

There are various techniques that you can use to make sure you are trading in the right conditions. For example, you can use multiple time frame analysis to determine an overall market direction on a higher time frame and enter your positions on a lower time frame. You can also make use of moving averages to confirm that the price is trending. There is no fixed rule as to how many trades you can enter when using advanced scaling in, but you must never risk more than 2% of your account in total.

You should also note that aside from having a reason to believe the market will continue on in the original direction, you must also have a reason to enter into each position within the actual retracement, such as when you observe a candlestick pattern or if the price finds support or resistance. In other words, you should not simply randomly enter further trades when the market is moving against you.

Summary

So far, you have learned that:

• scaling is a method of trade management that maximises profits and reduces risk.
• scaling into a trade means that you enter with just a fraction of the intended amount that you wish to trade and then add to the position as the trade develops.
• scaling out means that you exit fractions of your position to lock in profit and leave in positions to take advantage of any further price runs.
• there are certain risks to scaling if you do not apply money management as this can increase the overall exposure of your account.
• caution is also advised when scaling in after a trend has been firmly established, as the later positions entered may be close to the end of a trend.

Summary 2

In this lesson you have learned:

• advanced scaling in is a technique whereby traders enter a position in stages while the price is actually moving against the direction of their trade.
• it can help you take advantage of retracements to achieve a better average entry price for your overall trade before the price moves in the direction you want.
• to identify retracements in an upward trending market, look for areas where the price drops slightly before continuing its upward swing.
• to identify retracements in a downward trending market, look for areas where the price rises slightly before continuing its downward swing.
• to use advanced scaling in, start by entering a trade using just a small portion of the money you ultimately want to invest in that direction.
• if the price moves in the opposite direction to the one you were hoping for and you believe this to be a temporary retracement, add to your first trade with another modest-sized trade in the same direction.
• the initial entry when using advanced scaling in is known as the aggressive entry and tends to be bigger.
• subsequent entries are called conservative entries and tend to be smaller in size.
• advanced scaling in is best used as part of a trend-following trading strategy and should not be attempted in a non-trading or range-bound market.
• it should only be used when you have a strong reason to believe that the price will ultimately move in the direction of your trade, and only in combination with stop losses.