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Scaling In and Out of Positions Full Overview

Scaling In and Out of Positions Full Overview

So, we are finally done with the scaling in and out trade guide. Let’s get a quick recap to make sure we are all on the same page going forward.

Rules to Safely Scale In and Out of Trades
  • Always use stops, no matter what.
  • If the combined positions are in the risk comfort zone, add losing positions then.
  • If you wish to add to the winning positions, always trail your stop to control the additional risk of a bigger position.
  • Predetermine the correct position sizes before you trade.
  • Scaling into winning trades is best suited to trending markets.
  • Scaling out suits range-bound markets.

So, now you know about the right ways of scaling in and out of trades.

Following the rules is the ultimate key and sooner or later you will get the desired results.

How To Scale Out Of Positions

How To Scale Out Of PositionsScaling out has a direct link to reducing your risk as it takes away the exposure to the market, no matter if you are in a winning or losing position. When it is used with trailing stops, it makes the trade nearly risk free. Wondering how it happens? Let’s show you an example.

Scaling out of EUR/USD

Let’s suppose you have a $10,000 account and you shorted 10k units of EUR/USD at 1.3000. You have placed the stop at 1.3100 and your profit target is 300 pips below the entry at 1.2700.

Your total risk is 1% of your total account i.e. $100 and your pip value of the position is $1.

After a few days, the EUR/USD has moved lower to 1.2900, or 100 pips in your favor. This means you have a total profit of 1% gain or $100. Because of a statement released by the Fed, there are high chances that the USD may weaken in the short term.

You may think, this may force the dollar back to the market and now is the time to make some profits. In order to do so, you lose half of your position by buying 5k units of EUR/USD at the prevailing exchange of 1.2900.

This means the profit of $50 becomes evident in your account. What happens next is that you are left with an open position of 5K units short EUR/USD. At this point, you can adjust your stop to breakeven (1.3000) to create a “risk-free” trade. Even if the pair increases in value and stimulates your stop at 1.3000, you have the option to close out the remaining position with no loss, and if it goes down then you can just ride the trade to more profits.

It is also certain that the trade-off for by redeeming some of the amounts can reduce your original max profit. With that being said, if EUR/USD fells to 1.2700 and you have caught the 300-pip move with a 10k unit position of EUR/USD, then your profit is surely going to be $300.

However, you have chosen to close 5k units at a 100-pip gain for $50, and then you closed your remaining 5k at a 300-pip gain for a $150 gain ($0.50 per pip * 300 pips = $150). Together, this makes a $200 gain versus your original $300 max profit.

What’s better for you is quite obvious! Higher profits always come with higher risks and this is what you need to understand. In our next lessons, we will discuss the potential scenarios of scaling into a position.

How To Scale In Positions

We now know how to trade in and out of a trade, but what about scale IN a trade. In the first case, we will cover examples when your trade is going against you. Adding more units to a losing position should never be done by a new trader in any way. When a trade is always in a losing position, why add more and lose more? Doesn’t make any sense!

If you can add to a losing position and the combination of your position stays within your comfort zone, there’s no harm in doing so. Here are 3 rules that you should follow:

  • Stop loss is mandatory and should not be missed.
  • Points of entry should be calculated before the trade is made.
  • Position sizes must be predetermined and total risk is within the comfort zone.
Trade Example

Let’s have a look at this chart: It is clear that the pair has moved below 1.3200 and market is in a bit of consolidation between 1.2900 and 1.3000 before it further breaks. After falling to 1.2700 to 1.2800, the pair reached the area of recent consolidation. Here a few scenarios are possible.

Entry 1: Short at the broken support turned resistance level of 1.2900, the bottom of consolidation level.

The drawback of entering in this scenario is that the pair may move higher and you may not get a better price.

Entry 2: Wait for the pair to reach the 1.3000 consolidation area that is a significant level with the great resistance level

However, if you wait to see if the market reaches 1.3000, you run the risk of the market not making it all the way up there and it drops back down lower, and you’d miss the return to the downtrend.

Entry 3: The pair moves back below 1.29000 showing the downward trend after the pair has tested the potential resistance area.

In this scenario, the sellers are back in control but you can miss out on getting in the downward trend at a better price.

Entry 4: Enter at both 1.2900 and 1.3000 that is quite doable.

As long as the trade does not go down, you can follow this plan as well.

Calculating Stop Loss (Trade Invalidation Point)

To keep it simple, let’s suppose you pick 1.3100 as the level that indicates you were not right and that the market will continue to move in the upward trend.

That is where you exit your trade.

Calculate Entry Level

Secondly, determine your entry levels where you can add positions. In this case, the support resistance at both 1.2900 and 1.3000 are the feasible positions.

Calculate Position Size

Let us now calculate the correct position sizes to make sure we are in a comfortable risk level.

Let’s say you have a $10,000 account and you only want to risk 2%. That means you are comfortable risking $200 ($10,000 account balance x 0.02 risk) on this trade.

Trade Setup

The one way to set up this trade is:

Short 2,500 units of EUR/USD at 1.2900

2,500 units of EUR/USD at 1.2900 and as per the value is shown by the pip calculator, 2,500 units of EUR/USD suggests that your value per pip movement is $0.25.

With your stop at 1.3100, you have a 200 pip stop on this position and if it hits your stop that is a $50 loss (value per pip movement ($0.25) x stop loss (200 pips)).

Short 5,000 units of EUR/USD at 1.3000

In this case, the pip value calculator shows 5,000 units of EUR/USD at per pip movement of $0.50.

With your stop at 1.3100, you have a 100 pip stop on this position and if it hits your stop that is a $50 loss (value per pip movement ($0.50) x stop loss (200 pips)).

Collectively, this is a $100 loss provided you are stopped out.

We have made an exchange where we can enter at 1.2900, and regardless of whether the market went higher and made a losing position, we can enter another position and stay securely inside typical hazard parameters.

What’s more, just in the event that you were pondering, the blend of the two trades makes a short position of 7,500 units of EUR/USD, with a normal cost of 1.2966, and a stop misfortune spread of 134 pips.

How To Add To Winning Positions

Scaling is one of the techniques that can increase your maximum profit.

There are specific rules to add winning positions:

  • Use predetermined entry levels for additional units.
  • Calculate your risk again after adding the additional units.
  • Trail stop loss to keep growing position within comfortable risk parameters.

Example

Examples are the only medium of communicating this concept to you. So, let’s discuss one again.

Let’s consider you are closely watching EUR/USD and believe that the traders will push the pair higher making you buy some Euros against the USD at 1.2700.

First, you observe that recent consolidation never really traded below 1.2650, so you decide to put a stop below that level at 1.2600.

You are also a strong believer that because it is a psychologically significant resistant level, 1.3000 would be a great level to take profits because the chances look extremely bright.

Having a 100 pip stop and a 300 pip target of profit, your risk-to-reward ratio is 1:3. That makes sense, doesn’t it?

You generally risk just 2% of your account per trade, however this time you believe with this trade and with the incredible risk-to-reward proportion, the market is in your favor.

You end up including more units to your trade with 100 pips and trail your stop to 100 pips. Since you have already anticipated including more units, you will choose to begin with an underlying risk of 1%.

With a beginning record parity of $10,000, your underlying risk will be $100 ($10,000 x 0.01).

With a 100 pip stop and $100 risk, you have further decided that your underlying position size should be 10,000 units (position sizes can be determined with our position measuring adding machine), so you will include 10,000 units each 100 pips, and trail the stop at every 100 pips.

Let’s further elaborate on this to make it easy to understand for you. This streamlined model elaborates on the fundamental system of the best way to securely add to winning positions and how successful it may come out as to expand your profits.

Currently, before you go bragging about and increasing each winning position you have, you must know that adding to winning positions may not be the best way to cope with the market condition or environment.

When all is said in done, scaling into winning positions is most appropriate for drifting markets or solid intraday moves. Since you are adding to a situation as it goes in your desired direction, your normal opening price moves toward the move too.

This means if the market pulls back against you after you have included, it doesn’t need to move as far to get your trade into the negative region. Understanding the basics is the key here and you have no other choice of doing so because of what is at stake.

Furthermore, you should realize that scaling into winning positions in range-bound markets or times of low liquidity leaves you open to being stopped out frequently. In conclusion, by adding to your position, you are additionally spending any accessible edge.

Wrap Up

So, we are finally done with the scaling in and out trade guide. Let’s get a quick recap to make sure we are all on the same page going forward.

Rules to Safely Scale In and Out of Trades

  • Always use stops, no matter what.
  • If the combined positions are in the risk comfort zone, add losing positions then.
  • If you wish to add to the winning positions, always trail your stop to control the additional risk of a bigger position.
  • Predetermine the correct position sizes before you trade.
  • Scaling into winning trades is best suited to trending markets.
  • Scaling out suits range-bound markets.

So, now you know about the right ways of scaling in and out of trades. Following the rules is the ultimate key and sooner or later you will get the desired results.

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