Scaling In & Scaling Out in Forex

Hello Forex Traders,

Scaling in and scaling out is the topic of today’s article. The money and trade management technique is a sophisticated method to keep losses small and allow for bigger profits. Or in other words: it is not important how many times a Forex trader wins or loses, but how much does a trader gain with profitable trades versus how much is lost with losing trades.

When using the scaling in and out technique, a Forex trader adheres to this principle and maximizes the potential earnings. Money management, however, is not the only important element within trading. The Forex trader must be proficient in other parts as well in order to thrive and profit:

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SCALING IN AND OUT OPTIONS

There are many variations how a Forex trader could scale in and scale out. Let us examine them.

The SCALING IN money management technique means that the Forex trader decides to open multiple positions at (predetermined) different price levels. In the standard situation a Forex trader takes one trade, however when scaling in a Forex trader divides the entries in multiple parts.

The entries can be added at various spots. The Forex trader can always make these choices:

a)      Trade immediately

b)      Trade upon breakout

c)       Trade upon pullback

With scaling in, the trading decision tree becomes this:

a)      Trade immediately, scale in with pullback and/or upon breakout, etc

b)      Trade upon breakout, scale in with pullback and/or 2nd breakout, etc

c)       Trade upon pullback, scale in upon breakout and/or 2nd pullback, etc

Of course, upon each pullback and/or breakout, the Forex trader can decide to split multiple positions as well. During a phase where price is retracing back to the Fibonacci retracement tool, a Forex trader can decide to place entries at both the 50% and 61.8% Fibs.

The multiple entries can be implemented using various patterns, tools, indicators, or combination of them. It is not in the scope of this article to discuss the Forex strategy in detail.

The SCALING OUT  money management technique means that the Forex trader decides to exit individual positions at (predetermined) different price levels. In the standard situation a Forex trader exits the trade at one spot, however when scaling in a Forex trader divides the exits in multiple parts, such as a mix of actual take profit levels, soft profit zones and/or trail stops.

This scaling out technique is valid for the stop loss placement, the take profit placement, the trail stop method. A Forex trader could choose to have part of the position with a tight stop loss, and the other part with a loose stop loss. A Forex could also choose to have part of the position with a wide take profit, and the other part with a tight take profit. A Forex trader must ensure that the entire trade (and all individual trades) meet a sufficient reward to risk balance. The options for scaling out could mushroom and balloon quickly.

To give an EXAMPLE: many Forex traders feel uncomfortable when in profit as they do not want to give back the profit. Forex traders could use a trail stop to safe guard the trade from big swings. But the other method could also be to split the scale out in 2 and take profit on 1 half at 1:1 reward to risk, leaving the stop loss at the original spot for the 2nd part and aiming for a higher take profit for the 2nd part. This way the risk is also reduced to zero upon price hitting the first target, but allows for another part to aim higher. In fact, both methods are good and it depends on each trading personality as well from FX trader to FX trader and from strategy to strategy which of the 2 could make more sense. They both achieve the same goal: money management helps the profitability and trading psychology with implementation.

Important explanations:

1)      Both techniques must not be used simultaneously! A Forex trader could scale in BUT use the same profit taking level. A Forex trader could also enter the trade at the same price level BUT use a scaling out technique to exit the trade.

2)      The techniques could vary during the trading plan. A planned breakout scale-in could be cancelled (when stated in trading plan under which conditions). A planned trade exit could be changed at a certain spot (when for instance mentioned in trading plan that trail stop will be used above 50 pips profit, etc).

ADVANTAGES AND DISADVANTAGES

Some of the advantages of scaling in and out are the following:

a)      Keeping losses small when losing

b)      Allowing wins to be big when winning

c)       Having a better average price, hence a bigger position size

d)      Potentially making profit by scaling out, and then scaling back in again on a pullback for instance

e)      Having a trading plan that allows for flexibility in its engagement with the market

f)       The technique enhances potential profitability and reduces overall risk

Some of the disadvantages of scaling in and out are the following:

1)      The trade management is (more) complex and requires (more) time and attention

2)      Using this technique at incorrect times and outside of the trading plan should at all costs be avoided

3)      Forex trader needs to very secure and ensure correct implementation of the process

4)      In cases where not all entries are trigged, winning trades could win small and losing trades could lose more

IMPLEMENTATION

The actual implementation of this technique certainly needs practice. As everything else in life, the only way to master a skill is by practicing over and over again. The best method to learn is to do so via a mentor.

In our Forex trading room at Winners Edge Trading, we implement a strategy named the “Double Trend Trap” Strategy that has 2 different methods: a breakout strategy (named strike) and a pullback strategy (named boomerang).

By implementing the strike and boomerang, a Forex trader automatically scales in and out by just following the rules and guidelines of the Double Trend Trap (DTT for short). Having those set rules and guidelines greatly help with easing the process of learning how to use this money management technique. Read more here about the advantages of a live trading room.  And click here to join the trading room. 

20- 12- 2013 edu

THE RULES

Some Forex traders might wonder: isn’t adding to a losing position incorrect? The answer is a definite YES if the add-on occurs as a spur of the moment decision. In this scenario the Forex trader is adding risk to the open and exposed position. If, however, the scale-in is preplanned and the new trade positions are part of the overall trading plan, then this technique is fine.

In this case, the overall risk does not increase by adding a position. The Forex trader does need to follow this process though:

1)      Forex trader chooses risk % for entire trade

2)      Forex traders decides how many positions entire trade will have

3)      Forex traders chooses entry, stop loss and take profit mechanism for all positions

4)      Forex trader splits total risk among the number of positions

5)      Forex trader calculates position size for each position of trade

Example:

1)      Forex trader takes 1% risk

2)      Decides for 3 positions

3)      Various positions:

  1. 1 position at 50% Fibonacci retracement pullback, SL bottom/top, TP -618
  2. 1 position at 61.8% Fibonacci retracement pullback, SL bottom/top, TP -618
  3. 1 position at 78.6% Fibonacci retracement pullback, SL bottom/top, TP -618

4)      Risks the total 1% among the 3 positions:

  1. Forex trader risks 0.2% at the 50% Fib
  2.  Forex trader risks 0.35% at the 61.8% Fib
  3. Forex trader risks 0.45% at the 78.6% Fib

5)      Forex trader calculates positions size

  1. In this case the 50% Fib has the least risk and the widest stop loss, so the position size will be smallest in this case. The 78.6% has the biggest risk % and tightest position size so it will have the biggest position size.

Basic premise: as long as the concepts used are well tested, pre-planned and part of the trading plan, then the scaling in and out technique can be a very useful element within Forex trading.

Do you use scaling in and/or scaling out? If yes why? If not, why not? What is your experience? Let us know down below!!

Thanks for sharing and Good Trading!

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  • Chris

    Wow, that is awesome! Really happy to hear that the article has helped. Good luck with practicing these concepts. If you ever need advice, please do not hesitate to ask. Have a great weekend!

  • louriss

    I didn’t now about this earlier about scaling in and out. I really impress from this article this will really help me in fx-insight. thanks