Scaling Out and Scaling In

How to grow rich and relieve stress with scaling out

The scaling out technique is one of my favorites for reducing stress if the market quickly turns in my favor. If I take just a little portion of my winning position off the table to lock as profit, I will have more room to breathe and less likely have a panic attack if my trade still has a long way to go.

Although the right side of the chart has a tendency of creating anxiety, I always try to find a signal of any sort that might just tell me whether or not it’s a good time to get rid of the randomness while making a trading decision.

Scaling is a good way to make more profits if your signals are hinting that the trend is going strong in your favor.

Let’s talk about how to make sure that your risk is under control when you’re scaling or adding to a position. Use calculations for proper trade sizing and keep your risk percentage in line.

Reducing stress is important during a trade, it lets you focus on the trading instead of being subjected to emotions like fear and greed. If you scale out of the positions properly, you can not only become more profitable, but reduce your stress significantly as well.

Here’s the thing:

To be able to scale out of the trades, you need to make your initial trade size big enough so you can reap the benefits of scaling out.

The technique can be applied in both long and short positions and for pretty much any market, whether it is future, stock, index, or option.

The key idea is to set a large enough trade size without risking over 2 percent at the entry point.

Scaling out can be like an insurance policy to lock profit. It’s a great technique that can be used in a lot of different ways and can be tested on your own approaches to see what works better for you.

Easy ways to maintain risk control while increasing trading size

To warrant scaling out, you need to set a large enough trade size and have one contract so that the trade won’t get you anywhere. It’s better to have at least three to be able to make the technique work the way it should. In addition to a big enough trade size, you should keep your trade risk under 2 percent.

Another good idea is to use options leverage, but be familiar with the options. It means you need to understand their time value decay, delta, etc. Using options is considered a specialty or even an advanced technique. If you’re not familiar with them, this method can just lead to increases in stress and risk.

E-Mini scaling out example

Once your trade becomes profitable, scaling out will come into play. At the point of your trade when it gets significantly beneficial, a part of the position should be covered and there should be enough liquidated contracts so that if you ever get stopped out, you could still make a profit.

If you happen to have a large enough trade size, then it might be a good idea to liquidate another portion of contracts just to lock up additional profit. The last portion shouldn’t be touched.

Until you get stopped out, enjoy the rest of the trade and let it continue as long as the trend exists, knowing that no matter what happens, you will still make a profit, either way.

Look for reverse signals that might tell you to scale out. Make up some rules to work according to a plan so your scale outs are based on technical or fundamental signals of some type.

The psychology of scaling out is to reduce stress by locking profits, which should help you to stay in trends with your leftover positions for a longer time.

Scaling in to increase the trade size

Because we are discussing money management and risk control, it would be a good idea to talk about how to control risks using the popular strategy of adding to trends to increase trade size and profits. This technique is called scaling, or “adding to” a trade in progress and usually is used in the trend trading.

In general terms, it is for increasing your trade size on the up and running trades while maintaining the strict risk control throughout the whole process. The reason for scaling into a trend is to gain more profit.

When you add to your position at a loss, you increase your trade size and lower your cost basis. But you also increase your trade risk. Due to this, the new added-into position will assume risk in addition to the risk of your initial open trade.

So now you have an increase in the overall risk of your trade. For this reason, doubling down can be a losing game, since your risk increases beyond the risk-of-ruin percentage guidelines that are used for the careful calculating of the trade size, which determines your trade risk on the initial position.

Think about it this way. When you add to or scale into a trade using this technique, you don’t incur additional trade risk because your new trailing stop loss nullifies the risk taken from the initial position.

And if you scale into, you do it with the trade size that is calculated carefully enough to not do any damage. Afterwards, your overall trade risk will be the only one.

Try It Yourself

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