Trading can be a great way to make money, but it’s not always easy to get started. One important aspect of successful trading is knowing how to scale into positions. In other words, how to buy or sell more as the market moves in your favor.
Scaling into positions may sound complicated, but it’s quite simple. In this blog post, we’ll give you an example of how to do it so that you can start implementing this strategy in your trading.
What is Scaling In?
Scaling into a position in trading is the process of adding more units to a position over time, rather than all at once. Essentially, it’s an incremental increase in units being bought or sold by a trader. As risk management is key to trading success, scaling into positions can offer great benefits for both novice and advanced traders alike. Scaling in slowly with multiple quantities allows traders to adjust their strategy to current market conditions while mitigating risk with each successive open position. This can be done manually with the buying and selling of orders at various intervals or automatically depending on market conditions and updated data. The concept of scaling into positions is an important one to understand when getting involved in the market, as it helps maximize profits without sacrificing safety.
The Benefits of Scaling into Positions
There are several benefits of scaling into positions when trading, such as reducing risks and increasing profits. Scaling into positions involves entering the market with multiple smaller trades instead of one larger trade, thereby allowing the trader to slowly but steadily increase exposure in the market while ascertaining the potential success or risk of holding the specific position.
Furthermore, scaling in also helps traders manage their open positions more effectively by letting them divide losses and adjust their individual trade sizes per particular entry. As a result, traders have full control over both their capital exposure and overall position by controlling how much they invest in each trade. By employing a disciplined approach to scaling into the markets, traders can see their profits rise over time with substantially reduced risks compared to trading large positions all at once.
Determining the Best Time to Scale into a Position
Knowing when to scale into a position is one of the most important aspects of successful trading. It requires careful consideration, as it can be the deciding factor between making and losing money. One way to ensure success is to use technical indicators like moving averages, RSI, and trendlines to identify potential opportunities in the market. Additionally, looking at macroeconomic data can help traders determine if current market conditions are favorable for scaling into a position. Finally, traders need to keep an open mind and consider both long-term and short-term perspectives when making decisions about when to scale into a position – having too narrow a scope may result in missed opportunities or costly mistakes. Ultimately, with careful research and analysis, traders will be better equipped to determine when the best time is for them to scale into a position on any given trade.
An Example of How to Scale into a Losing Position Properly
You can scale into a position when the trade is going in your favor or when the trade is going against you. Scaling into a losing position is a tricky and often dangerous situation for any trader to be in, especially for novice traders.
Scaling into a losing position can be a difficult decision for any trader to make, but with the right approach and risk management strategies, it can bring substantial rewards. If you are considering adding to a losing position, you must assess the risk of your combined positions carefully to ensure that your comfort level is not exceeded.
Scaling into a losing position comes with some hard and fast rules:
- Use a stop-loss. This is non-negotiable.
- Entry levels must be decided upon in advance.
- Position sizes must also be predetermined so that the total risk is still within your comfort level.
Let’s take a look at an example of how scaling into a losing trade might play out.
From the chart above, we can see that the GBPUSD moved lower from the 1.2030 high, and then the pair saw some consolidation between 1.1960 and 1.1860. Then, the price broke lower.
After reaching an absolute low of around 1.1760, the price retraced to the previous consolidation zone. Now you think the GBPUSD is going to return to the downside, but you don’t know where to pick an entry. You have a few options:
- Short at the broken support-turned-resistance level of 1.1860, the bottom of the consolidation level. The disadvantage of entering at 1.1860 is that the price could move higher, and you may have entered at a better price.
- Wait until GBPUSD moves to the top of the consolidation zone at 1.1960 and short there. Here the risk is that the price doesn’t get back there and then drops lower — you missed the downtrend.
- Wait until the pair tests into the resistance zone and then falls below 1.1860 again. This is the more conservative approach but you may miss a better entry near the top of the consolidation zone.
- Scale into the position at both 1.1960 and 1.1860 — which is what we’ll discuss below.
The Parameters of Your Trade
First, let’s set some parameters…
- Stop-Loss (Invalidation Point) – Let’s set this at 1.2000 above the consolidation zone, where you will exit your trade.
- Entry Level(s) – There was support and resistance at 1.1960 and 1.1860, so you’ll add positions there.
- Position Size(s) – Let’s say you have a $10,000 account and you only want to risk 2% — which means you’re OK risking $200 on this trade.
The Trade Setup
One way to set this trade up is as follows…
Short 5,000 units of GBPUSD at 1.1860.
At a pip value of $0.50 per pip and a stop at 1.2000, you have a 140-pip stop. If the trade hits your stop, that’s a $70 loss.
Short 10,000 units of GBPUSD at 1.1960.
At a pip value of $1 per pip and a stop at 1.2000, you have a 40-pip stop. If the trade hits your stop, that’s a $40 loss.
Altogether, with both trades, the potential loss is $110 — well below your $200 risk threshold. We have created a position where we can enter at 1.1860 and even if the trade does not move in our favor, we can add on to a losing position within our risk parameters.
What’s the reward? Your average entry on both trades is 15,000 units at an average price of 1.1927 and a stop-loss spread of 73. If the market went down after both positions were triggered, then a 1:1 risk-reward would be achieved if the market hit 1.1854 — average price (1.1927) minus stop spread (73 pips).
Since most of your position was entered at the better price of 1.1960, the pair doesn’t have to fall far to make a decent profit. Let’s see how we did…
An Example of How to Scale into a Winning Position
We talked you through an example of how to scale into a losing position. Now, let’s show you a more exciting proposition: scaling into your winners!
The Parameters of Your Trade
First, let’s set some parameters…
- Trail Your Stop-Loss – Keep growing your position within a comfortable risk ruleset.
- Entry Level(s) – Precalculate your entries.
- Risk – Calculate risk with the additional added units.
The Trade Setup
One way to set a trade up is as follows…
You’ve seen a trend develop watching the AUDUSD, and after some consolidation, you surmise that the pair will push higher, so you plan a BUY entry at 0.7200.
The pair never really traded below the 0.7000 mark in that recent consolidation, so you decide to place your stop at 0.6950.
Previous highs around 0.7700 lead you to believe that that would be a great target for your take-profit mark.
With a 250-pip stop and a 500-pip profit target, you’ve identified a nice little trade with a 1:2 risk-to-reward ratio.
You usually only like to risk 2% of your account on a trade, but given your confidence in this position and the nice risk-to-reward scenario, you decide that you’ll add on to this position if it materializes in your direction. The plan is to add more units every 167 pips and trail your stop 167 pips.
Since you’ll be scaling into a larger position, you decide to get into the trade with an initial risk of 1%. With a starting balance of $10,000, you’ll be risking $100 initially — or 10,000 units. You’ll add on an additional 10,000 units for every 167-pip move in your direction and trail your stop every 167 pips.
Now, let’s calculate the change in risk-to-reward at each juncture…
First, you buy 10K units at 0.7200 and set your stop-loss to 0.6950. The risk to your position is $250 and the profit target is $500.
Next, you add 10K units to your position at 0.7367 and adjust your stop-loss on all positions to 0.7117. Risk has risen a bit to $333 — well within your risk tolerance — and profit potential is now $833.
Lastly, you add another 10K units at 0.7534 and adjust your stop-loss on all positions to 0.7284. Risk is back down to $249 and profit potential is now $1,000.
Boom! The market hit your profit target and you banked $1,000 in profit — instead of your original $500 profit target!
This simplified example provides a deeper insight into the technique of adding to winning positions and how it can be used to maximize returns. It is important to understand the parameters that need to be set before entering a trade, such as the stop-loss point, entry level, and position size. This allows you to create a trading strategy with clearly defined parameters and limits, helping you to stay disciplined while trading. Be sure that the risk is also calculated when adding units as this will help mitigate losses in case of an unexpected market move.
Generally, scaling into larger positions is best in trending markets and strong intraday price action— NOT ranging markets where you can get stopped out easily. Also, keep in mind that since you are adding on to your position, your average open price moves in the same direction as your trade and, thus, if the market pulls back after you have scaled in, it doesn’t need to go far to get you into negative equity. Lastly, by scaling into your positions, you are also using up the available margin, leaving you with a less available free margin for other trades.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.