As previously stated, scaling out offers the apparent benefit of lowering your risk by removing exposure to the market.. whether you are in a winning or losing position.
When combined with trailing stops, it is also possible to lock in winnings and create a “nearly” risk-free transaction.
We’ll walk through a trade example to see how this can be accomplished.
Example: Scaling out of EUR/USD
Assume you have a $10,000 account and have shorted 10,000 EUR/USD units at 1.3000.
Your stop is at 1.3100, and your profit goal is 300 pips lower than your entry at 1.2700.
With 10k EUR/USD units (pip value is $1) and a stop of 100 pips, your total risk is $100, or 1% of your account.
After a few days, the EUR/USD has dropped to 1.2900, or 100 pips in your advantage. This equates to a total profit of $100, or a 1% gain.
The Fed makes dovish comments, which may lower the USD in the short term.
You think to yourself, “This may attract dollar sellers back into the market, and I’m not sure if EUR/USD will continue to fall… “I should secure some profits.”
You decide to close half of your position by purchasing 5k EUR/USD units at the current exchange rate of 1.2900.
This deposits $50 into your account [at 5k EUR/USD units, 1 pip is worth $0.50…. you have closed a profit of 100 pips (100 pips x $0.50 = $50)]
This leaves you with a 5k unit short position in EUR/USD at 1.3000. Adjust your stop to breakeven (1.3000) to create a “risk-free” trade from here.
If the pair rises again and triggers your modified stop at 1.3000, you may close out the remaining position with no loss; if it falls, you can simply ride the trade to greater profits.
Obviously, “taking some off the table” means that your original maximum profit is decreased.
Now, if EUR/USD falls to 1.2700 and you captured the 300-pip move with a 10k unit EUR/USD play, your profit would be $300.
Instead, you closed 5k units at a 100-pip profit for $50, and then another 5k at a 300-pip profit for a $150 profit ($0.50 per pip * 300 pips = $150).
This results in a $200 profit over your original $300 maximum profit.
Here’s a chart to assist you visualize the many occasions when you should scale out. (Ignore the dragon’s attempt to expel his scales.)
It is always your choice whether to leave some profit on the table… You only need to consider the benefits and drawbacks.
In this case, the trade-off is a higher profit versus the piece of mind provided by a lower locked-in profit and the creation of a risk-free deal.
Which is preferable for you?
Is it better to make 50% more money or sleep better at night?
Remember that the market may move beyond your profit target, adding more bling-bling to your account.
When altering deals, there is always a lot to think about, and with practice over many trades, you’ll find a method that works best for you.
Following that, we’ll show you how to scale into positions.
“Why?” you may be wondering. “Why should I scale into a trade?”
If done correctly, scaling into positions will provide you with the benefit of boosting your maximum profit.
However, as the saying goes, “higher reward means higher risk.”
If done incorrectly, the value of your account could plummet before you can even consider closing your trade.
Before you know it, you’ll be looking at your computer screen, eyes wide open, when your account is called for margin.
We don’t want it to happen, do we?
As a result, pay attention in class!
The profitability of your open position when you add, how much more you add, and how you change your stops are what distinguish “the correct way” from “the incorrect way.”
In the following two parts, we’ll go through two possible situations for scaling into a position.