What is scaling in and out of positions, and is it wise to do so?
What comes next after position size calculation and setting stops?
Before scaling in or out of positions, it would be best to figure out how to set stops and calculate the best position size for your personality and style. Scaling in and out of positions is helpful, especially if you are trading more than one position. It allows you to manage and customize the risk that you are willing to take.
Have you ever heard of the term scaling in and out of positions?
Scaling in and out of positions means adding or subtracting specific units from the initial open position. It is a great tool that you can use to manage the risks of your trade further. Also, it can lock your profits or help you become more profitable if done right. And we say “if done right,” we mean that it also has its share of disadvantages, especially when done wrong.
Scaling, entries, and exit
Trade entry and exit are crucial parts of any trade. Hence, we try to get to the closest possible entry or exit that we think is perfect. However, there is no perfect entry and exit, especially when not one single soul can accurately give consistent predictions about the market price actions or turning points. This is where scaling in and out of positions enters the picture. There is only so much that we can do.
For instance, we can determine an area with potential support or resistance, momentum, breakout, or reversal. You can enter your position anywhere in that area you determined, or you can make a trade-off at different levels to lock the profits. A perfect entry and exit do not exist. So, scaling takes away that need.
Scaling helps in managing and reducing the risk. Also, scaling out when your position is winning can help you secure profits even if a reversal suddenly happens. However, it is only possible if scaling out of the position is done correctly with a trailing stop. If the market odds continuously go in your favor while adding more in your open position, the bigger position size will raise the amount you generate per pip. But what happens if the market went against my favor instead?
Risks, disadvantages, and scaling positions
If the market movement goes in the opposite direction you favor and you scaled in, you increase your risks. If you did not correctly scale in, the worst-case scenario would be your account getting wiped out. On the other hand, scaling out means reducing the maximum possible profit that you can get. However, sometimes, it is not really harmful to scale out because the forex market will always be volatile and dynamic.
Should you scale your positions?
Traders, above anything else, are risk managers. They try their best to grow their deposited capital or preserve it, at least in challenging situations. If you are wondering whether scaling in and out positions can be helpful to you or not, it would be best to know more about it in detail.