Advanced risk management
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Scaling in and out of trades
Instead of entering and exiting entire positions in one go, many traders use scaling to manage their risk.
You can achieve this in two ways: scaling into positions, and scaling out of them.
- What is scaling in?
- How to scale into trades
- Benefits and drawbacks of scaling into trades
- What is scaling out?
- How to scale out of trades
- Scaling out after your profit target
What is scaling in?
Scaling in is a method of opening trades that involves starting with a small total exposure and adding to it gradually over time. Doing this may reduce your risk, because if you get your entry wrong and your trade fails early, you won’t lose as much capital.
How to scale into trades
To scale in, you select two or more entry levels for a trade instead of one. You open your position at the first entry level with a small total size, then add to it at each subsequent one.
This is particularly useful if, say, you have identified two possible entry points – one that offers a higher return but comes with more risk, and a safer option with lower potential profits.
By scaling into a trade, you don't have to choose between the two. You can open your position when you think a trend is just beginning to form, then add capital as the trade earns profit.
When doing this, there are three general guidelines to follow:
1. Plan your entries beforehand
You'll need to ensure that you define your entry targets ahead of time. Don't just randomly decide to add more to a winning trade, identify key areas of support or resistance that signal a continuation if they are broken.
2. Watch your risk and reward
As you add capital to a position, your risk will increase. The market will be further from your stop, and closer to your profit level. To see how this works in practice, let's take a look at a sample trade on GBP/USD where exposure is increased 100% at each entry:
| Open | Stop | Profit target | Risk to reward | Total risk to reward | |
| Entry 1 | 1.3700 | 1.3650 | 1.3800 | 50:100 | 50:100 (1:2) |
| Entry 2 | 1.3740 | 1.3650 | 1.3800 | 90:60 | 140:160 (1:1.5) |
| Entry 3 | 1.3780 | 1.3650 | 1.3800 | 130:20 | 270:180 (3:2) |
As you can see, each subsequent new position has a drastically worse ratio of risk to reward. However, it's easy to remedy this. All you have to do is move your stop loss.
3. Move your stop loss to control risk
If we move our stop loss each time we increase exposure, then total risk can be kept in check. Returning to our example above:
Entry 1
| Open | Stop | Profit target | Risk to reward | |
| Entry 1 | 1.3700 | 1.3650 | 13,800 | 50:100 (1:2) |
Total risk vs reward: 1:2
Entry 2
| Open | Stop | Profit target | Risk to reward | |
| Entry 1 | 1.3700 | 1.3690 | 13,800 | 10:100 (1:10) |
| Entry 2 | 1.3740 | 1.3690 | 13,800 | 50:60 (5:6) |
Total risk to reward: 1:2:6
Entry 3
| Open | Stop | Profit target | Risk to reward | |
| Entry 1 | 1.3700 | 1.3730 | 13,800 | 0:100 |
| Entry 2 | 1.3740 | 1.3730 | 13,800 | 10:60 (1:6) |
| Entry 3 | 1.3780 | 1.3730 | 13,800 | 50:20 (5:2) |
Total risk to reward: 1:3
By moving our stop loss, we lowered overall risk on the trade while increasing potential return. And along the way, we locked in some profits for good measure.
Benefits and drawbacks of scaling into trades
Benefits
There are three main benefits to scaling in.
Firstly, it means that you don’t have to worry too much about getting your entry 100% correct every time.
It also enables you to target higher profits without taking on too much additional risk – as long as you do it correctly, as outlined above.
And finally, by scaling in you can reduce your exposure and risk less on each new trade. This opens up a strategy of taking multiple new positions, then building on the successful ones and closing off the losers. Some traders refer to as ‘pyramiding’ into a trade, and it can be a highly-effective trading strategy in strongly trending markets.
As well as increasing diversification, such a strategy is a useful way of exploring new ideas without losing too much capital if they don't come off.
Drawbacks
However, scaling in isn't foolproof.
For one thing, you'll need to ensure that you don't end up risking too much on a position by your final entry. For instance, if you're allocating 3% of your trading balance to each trade, then don't scale in beyond that point. Plan out your entries beforehand – for example, by setting three entries and adding 1% of your balance at each point – to ensure that you keep your risk in check.
Scaling in can also be tricky for short-term traders. Day traders and scalpers tend to look for small profit horizons, not the strongly trending markets required.
What is scaling out?
Scaling out is the opposite of scaling in – it's a method you can use to close positions gradually, instead of with a single trade. By partially closing a position early, you can realize some profits without exiting it entirely.
By ‘booking in’ some profits as a trade moves in your favour, you can alleviate the psychological stress of trying to exit trades at the ‘perfect’ level.
How to scale out of trades
To scale out of a trade, you close a portion of it without exiting the position entirely. How much you close is up to you.
For example, say that you have a long position on EUR/USD that is $500 in profit. You're worried that the pair may be in for a reversal before it hits your profit target, so you close half of your position, realizing $250 in the process.
Still, EUR/USD continues to rise. You see further profits on the remainder of your position, but continue to be worried about an impending bear run. So, you half its size again. This locks in more profits, before you eventually close the position entirely.
Like scaling in, this works best if you adjust your stop loss at the same time. By moving your stop closer to the current price of the market, you can further reduce potential losses and may even be able to create a 'risk-free' trade.
Of course, if you'd kept your entire position open throughout, then your final profit would have been higher. However, you would have also taken on more risk.
TIP – Don’t scale out of losing trades. If your position is in the red and you’re considering partially closing it, then it’s probably a better idea to just exit it entirely.
Scaling out after your profit target
In our example above, we partially closed a position early to lower our overall risk on a trade. That works well, but it isn’t the only reason for scaling out.
If you have a position that has hit your profit target, but where you suspect that an extra return could be possible, you can scale out as a method of running profits. Essentially, you close most of your position, but leave a portion of it open to capture any possible continuation.
If your original move fizzles out, you can close the rest of your position to keep the profits. You may want to consider placing a stop loss at or near your original profit target. That way, you shouldn’t lose anything from scaling out.
