Remember, there is the possibility of the market moving beyond your profit target and adding more bling-bling to your account. If the pair moves back higher and triggers your adjusted stop at 1.3000, then you close out the remaining position with no loss, and if it moves lower then you can just ride the trade to more profits. This article takes a closer look at scaling out using two methods, one based on sample trades and another based on an article I read.
- Now that you know how to set proper stops and calculate the correct position size, here’s a lesson on how you can get a little creative in your trading.
- With the markets trending since
March, I decided to diversify and sold one utility stock completely and cut the remaining size of several others.
- If you have a winning position of three standard lots you can use any trailing method or exit strategy to close a portion of your positions as the price moves upward.
- A long time ago, I decided to test whether or not scaling out of a trade made sense.
To scale out is the process of selling off portions of total shares held while the price increases. To scale out, or scaling out, means to exit a position by selling in increments as the price of the stock climbs. Scaling out means selling part of a position to capture profits.
A trader using this strategy assumes that the price will ultimately stop falling and rebound, making the lower price they bought the shares at a comparatively good deal. To scale out of positions makes sense only when they are profitable as there is no reason to partially close out a trade once it’s proven unprofitable. Rather than setting a single profit target for the entire trade, an investor can set two or three incremental targets. It’s also possible to leave a part of the trade open without a limit at all and let an indicator or a trailing stop decide when it should be closed. Scaling out of a stock lets an investor reduce exposure to a position when momentum seems to be slowing.
Scaling Out Opening Position: Method 1
He used 72 stocks and ETFs chosen for their liquidity,
using the test period from December 31, 2003 through October 31, 2008, giving 4,176 trades. The Client commits to make his own research and from external sources as well to make any investment. The Client accepts that CFI will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.
Many traders quickly add to their longs as the spike rapidly … “…Setting the maximum-loss stop to the break even price dramatically reduces profit.” Once his system enters a trade in which it scales out,
he raises his stop loss to the initial entry price (break even). He concludes that using a break even stop forces the system to exit trades that would otherwise be profitable.
Trading Price Action Trading Ranges: Technical Analysis of Price Charts Bar by Bar for the Serious Trader by
We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. What separates “the correct way” from “the incorrect way” is the profitability of your open position when you add, how much more you add, and how you adjust your stops. He concludes by saying that moving the stop to break even when scaling out reduces profits to one-third. Howard Bandy, in the Active Trader article mentioned above, conducted simulations to determine whether or not scaling out is beneficial.
Scaling out of a trade is used for achieving similar goals as scaling in risk reduction, locking in profits, limit losses. Scaling out means selling a fraction of your total exposure after your position has become profitable, thus locking in some profit, while leaving other positions open in order to benefit, if prices continue to advance. This strategy allows the investor to take profits while the price is increasing, rather than trying to time the peak price. If the actual value continues to increase, however, the investor could be selling a winner too early.
Why Do Traders Use Scaling?
I limited stock prices to a minimum of $2 a share because low priced stocks tend to move erratically, with penny changes meaning large percentage … Profit drops because the stop takes you out of your big winners. I proved
that to myself when I looked at my own trades years ago. Rather, it highlights the need to know when to sell and when to hold. The content published above has been prepared by CFI for informational purposes only and should not be considered investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.
His trading system consisted of buying long at the close of the first trading day of
the month and selling at the close of the last trading day of the month. Trading commissions and slippage were not factored into the simulation. He used a “scale increment” to determined
the price at which a sale occurred, and it was based on the standard deviation of closing prices over the prior 21 trading days, evaluated once before buying each security.
What are scale-in and scale-out?
He finds that doing so “greatly reduces the profitability of the system.” The farther away from the
entry price the stop is placed, the more profitable the system becomes. Scaling out reduces the size of the loss but it does not turn losing trades into winning ones. You buy 200 shares at 10 and it drops to 9, leaving you with a net loss of $220 (buy & hold). If you were to scale out at $9 on the hope that price would rebound
but it drops to 8 instead, that gives you a loss of $330, which is worse than just selling the entire position at one time. To scale in to a position means to enter the position with just a small part of the amount that you actually want to trade, and then to add to the position as the price decreases. Scaling in, when effective, lowers the average purchase price, as the trader is paying less each time the security declines.
Should Trader scale in positions?
Then he tested the buy and hold method and the scale out method. The scale out method used various standard deviations ranging from 0.50 to 4.50 in 0.50 increments to set profit targets
used to scale out. When it was used, the stop price was set at the price of the initial buy creating a break-even point. The
stop only took effect once a scale out trade occurred (meaning you could not be stopped out before the first sale). As a variation, he also tested placing a stop as soon as the buy occurred.
Trading Basics: Evolution of a Trader by
Properly executed with a trailing stop, scaling out of winning positions can help you protect your profits just in case the price suddenly reverses. A few days later, the EUR/USD has moved lower to 1.2900, or 100 pips in your favor. With 10k units of EUR/USD (pip value of this position is $1) and a stop of 100 pips, your total risk is $100, or 1% of your account. When used with trailing stops, there is also the benefit of locking in profits and creating a “nearly” risk-free trade.