Scaling in and out of trades is an extremely useful strategy, yet it continues to be strategy that is rarely discussed. If done correctly this is a strategy that enables you to gradually build up your trade and therefore your risk, before gradually reducing your position.
Most discussions surrounding entry and exit of trades focus on when to exit rather than how to exit a trade. Yet whilst being a strategy that is rarely discussed, it is widely used by traders of forex and other assets.
What Is Scaling into a Trade?
This is the buying of additional units of you trade, as it moves in your favour. For example, if you are long 1 mini lot of euro versus US dollar, EUR/USD @ 1.2450, it moves higher to 1.2470 you buy an additional mini lot and so on.
If you are short EUR/USD @1.2430, the price drops so you add to your position by selling more at the lower price.
Why Scale into a Trade
There are several benefits to scaling into a trade. Firstly, this strategy enables you to gradually increase your risk. The initial position is small, you only go increasing your trade size and therefore your risk, once the trade has started to prove itself to be favourable. Here you are building on what has already shown itself to be a profitable trade. Meanwhile, if you just start with a larger position from the outset without knowing how the trade will perform, the risk is obviously greater.
This strategy can be useful if you want your position to remain hidden from the rest of the market. Buying lots of small units goes unnoticed whereas a very large trade will catch the attention of the market. This is perhaps more relevant to equities or more illiquid currency pairs. Secondly to prevent any large slippage which could happen on larger positions, although again this is more relevant for illiquid currency pairs or equities.
Scaling Out of a Trade
This is when you do partial closes on your position. You go closing small units of your trade, leaving the remaining units to continue gaining profits. This strategy enables you to lock in profit and as the trade continues and starts to less certain the size of the trades and therefore the risk reduces. Also, traders often slip in a stop loss at breakeven to protect the trade. Partial closes secure some profit whilst leaving the door open for further gains.
When is Scaling Used?
Scaling in and out should only be applied to winning trades. You should only scale in if the trade moved in your favour. If a trade is losing, it has already proved itself to be wrong, doubling up st this point could be disastrous for your account. The same rings true for scaling out. Only scale out of a profitable trade. If a trade is running a loss, its best to accept it is a losing trade and close out in one hit.
All the platforms which Vantage FX provides enable clients to scale into and out of positions.