Leverage, while being a double-edged sword, allows traders to become quite creative in how they handle their positions. And one of the frequently practiced techniques is scaling, which refers to increasing or removing specific units from your original order.
Scaling in is placing additional positions at predefined levels to maximize gains. Contrastingly, scaling out is removing a particular portion of the trading volume from your original position to reduce the uncertainty risk and lock in profits.
Overall, scaling allows traders to flexibly increase and decrease risk potential based on discretionary intentions for every position. Both concepts are pretty nuanced and present notable advantages and disadvantages.
So, let’s explore whether you should be scaling in or scaling out and the consequences of doing either.
What is scaling in?
When you scale in, it means you execute additional orders of the same or similar size as to your original position at predetermined price levels. As a trader, you have two options: entering with a standalone order or adding another (if you have enough margin).
For instance, instead of opening a standard lot position, adding another lot would double the profit potential if the price continued moving in your favor (but double the potential loss if the price went the other way).
Let’s assume you entered with one lot on EURUSD (where pip is worth $10) at 1.13000 with a 50 pip profit target (1.13500). Without adding an extra position, the potential gain is $500 ($10 X 50 pips).
However, if you decide to add another order of the same volume 10 pips from the original entry price (1.13100), you could stand to make $900 off a single trade setup:
Order 1: $500
Order 2: $400 (40 pips X $100)
This is the most basic example of scaling-in. Traders can become more sophisticated by adding more orders while adjusting the stop losses of the previous positions accordingly.
What is scaling out?
Scaling out is mostly the opposite of scaling in. With this technique, you intentionally reduce the volume of your original positions to secure profit while leaving the remaining portion to run for conceivably more gains.
Let’s go back to the previous EURUSD example, where you entered with a standard lot at 1.13000. Assuming the price did reach the 50-pip target at 1.13500, this would leave you with an open profit of $500.
Scaling out allows you to secure some of this gain while keeping the position to possibly make more. Without this technique, you would be forced to close the entire trade volume or move your stop loss to a defined profit level (but you would not have any closed profit).
With an open profit of $500, you could lower the standard lot by half and secure a $250 profit. Subsequently, this would leave you with a position worth 0.5 lots where the price may continue advancing in your favor.
Scaling-out aims to minimize risk uncertainty by limiting losses and locking in some gains. However, the most detrimental trade-off is you reduce the profit potential.
Why you should scale in with your trades (and why you shouldn’t)
It’s every trader’s dream to maximize their profits by growing their accounts as quickly as possible. Scaling in is one way for you to reach this goal faster. The key to implementing this technique consistently is using it in what you deem the most favorable conditions.
Sadly, this is hard to predict, making scaling-in far riskier than scaling out. One common problem with most traders is adding multiple positions very close to the price of their initial order.
This drastically increases the chances of an account blow-up or losing massive amounts of capital.
The most crucial part of scaling-in is performing it at logical levels as price moves in your favor allowing you to manage the risk of your previous order/s by moving the stop losses to breakeven or even scaling out.
Alternatively, a trader might decide scaling-in to a position by splitting their original volume into multiple entries without actually increasing the risk.
For instance, if you wanted to enter with a standard lot, you might do 0.5 at your entry point and another at a later price once you feel more confident.
Depending on how the price moved, if the market knocked out of the trade, you would have lost a lot less than if you entered with the whole lot. Overall, scaling in can work in certain conditions with the strictest money management to prevent the substantial risk of ruin.
Deciding on the lot sizes to use with the additional positions can significantly affect the results. Otherwise, you may choose to grow your account more safely and slowly by entering with single orders.
Why you should scale out with your trades (and why you shouldn’t)
One of the challenges of trading forex is dealing with open profit. Many scenarios exist where a position is profitable but not quite at the intended target. There are always chances for this profit to decrease drastically if the market moves adversely, sometimes even close to a trader’s entry point.
Traders are always looking for cases where they can secure some gains while not closing their positions to take advantage of particular setups. Well, scaling out provides you with this advantage.
Over the long run, traders can lessen their losses and deal with the uncertainty of available profit. On the downside, scaling out drops the size of your earnings over time, which is why many traders don’t use this technique.
Trading is all about maximizing your upside. However, you instead decrease your upside with scaling out, meaning your account growth becomes slower.
Final word
Given the options of reducing or increasing risk, most prudent traders would choose the former, and that’s what scaling out offers. Yet, for some traders, diminishing exposure in the markets matters less than maximizing their gains.
Therefore, your decision between the two boils down to what is more important to you: making more money at the risk of losing or making less money without the risk of losing.
Regardless of the technique you choose, it should be implemented logically and done in the safest way possible.
