Hello Forex Traders,
Scaling in and scaling out in forex 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:
OPTIONS FOR SCALING IN AND SCALING OUT
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 , akes one trade, however, when scaling in a Forex trader divides the entries into multiple parts.
The entries can be added at various spots. The Forex trader can always make these choices:
a) Trade immediately
b) Trade upon break out
c) Trade upon pullback
With scaling in, the trading decision tree becomes this:
a) Trade immediately, scale in with pull back and/or upon break out, etc
b) Trade upon break out, scale in with pull back and/or 2nd breakout, etc
c) Trade upon pull back, scale in upon breakout and/or 2nd pullback, etc
Of course, upon each pull back 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 into 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.
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 canceled (when stated in a trading plan under which conditions). A planned trade exit could be changed at a certain spot (when for instance mentioned in the trading plan that trail stop will be used above 50 pips profit, etc).
ADVANTAGES OF SCALING IN AND OUT
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
DISADVANTAGES OF SCALING IN AND OUT
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
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.
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 through:
1) Forex trader chooses risk % for entire trade
2) Forex traders decide how many positions entire trade will have
3) Forex traders choose 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
1) Forex trader takes 1% risk
2) Decides for 3 positions
3) Various positions:
- 1 position at 50% Fibonacci retracement pull back, SL bottom/top, TP -618
- 1 position at 61.8% Fibonacci retracement pull back, SL bottom/top, TP -618
- 1 position at 78.6% Fibonacci retracement pull back, SL bottom/top, TP -618
4) Risks the total 1% among the 3 positions:
- Forex trader risks 0.2% at the 50% Fib
- Forex trader risks 0.35% at the 61.8% Fib
- Forex trader risks 0.45% at the 78.6% Fib
5) Forex trader calculates positions size
- 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 scaling out? If yes why? If not, why not? What is your experience with this money and trade management technique?