September 07, 2017
You can actively manage your overall risk by scaling in and out of positions. Simply said, scaling means adding or removing units from the position size of your trade. This means, you add to your positions when the trade is profitable, and close some of your positions when the trade goes against you.
Scaling can help you to lock in your profits and reduce your overall risk on a particular trade. It also helps to catch the best entry point for a trade, as you can add to your position around an important price level without having to exactly know where the right entry point is.
However, scaling also comes with its drawbacks. While it can be used to reduce overall risk, scaling into a position can also increase your risk if you improperly add more and more units to an existing position. Scaling out of positions always reduces your risk as you reduce the market exposure, but also limits the potential profits you can make.
For example, let’s say you opened a long position on GBP/USD with a 10k position size (0.1 lots). As the price moves higher and your trade becomes profitable, you find out that the Fed might hike interest rates which is bullish for the US dollar. However, you don’t want to close your position completely as the news are not confirmed. Instead, you can simply scale out of the position by closing 5k units (50%) of the trade, locking in profits, and leave the remaining position open. A smart move would also be to put a trailing stop on the remaining position, in case the price goes against you.
Scaling into a position which is going against you can be risky, and should not be done if you’re new to the markets. However, if the total risk of the positions is inside your risk per trade, you can do so, but always remember to use stop-loss orders.
Let’s say the EUR/USD pair is approaching a major support zone, and you think about opening a long position. As this is a support zone, and not line, there is no precise price level where you could jump into the trade. Instead, you can scale into the trade by opening 5k units at one price, and once the trade shows to payoff, another 5k at a higher price. In this case, you reduced your risk of opening a 10k position if the support zone didn’t hold and the trade went against you.
When Scaling in and out of positions, you always need to follow these rules:
- The levels for adding or removing additional units should always be predetermined
- Your total risk should never exceed your total acceptable risk-per-trade, as stated by your trading plan and risk management
- Use trailing stops to limit the risks of scaling