Scaling in Trading – How to Scale In and Scale Out Properly

Trading concepts

Scaling in Trading - How to Scale In & Scale Out Properly

Scaling in trading is a technique of trade management. It allows traders to minimize potential losses and maximize potential gains. Additionally, this technique empowers them to take full advantage of price action and never miss out on any price movement. 

So, scaling in trading is a very crucial concept that all traders need to know. Are you interested in knowing what scaling in and scaling out of trading? If yes then you are on the right platform at the right time. Because in this article, we are going to explain in detail scaling in trading. Let’s dive deep and find out what these concepts are in the trading arena. 

Scaling in trading

Experienced traders don’t ever go all into or out of trading positions at once. What do they do? They always seek to divide risks and enter trading in or out in an incremental way. This is scaling in trading. 

Expert traders who see several entries or exit points employ scaling in trading. It is a good trading strategy that offers numerous advantages. However, it is also a complex process that sometimes gets overwhelming for traders.

Although it is a more complex technique of risk management, it helps traders minimize risks while maximizing profits. It is complicated as you have to watch for various entry or exit points. However, the benefits it offers offset the complications involved. 

Types of scaling in trading

There are two types of scaling in trading. The first one is scaling in and the second is scaling out.

Scaling in

Suppose you want to enter a trade but aren’t sure whether it will prove good or bad for you. Now, what should be your plan of action? Should you put all your eggs in one basket? In other words, should you risk all your capital at once despite being unsure of price action? No, it shouldn’t be your plan of action. Your plan of action should be the one that the scaling in strategy proposes. Yes, you send a spy to see whether the trade will go well or not. Once your spy confirms the favorable outcome, you can go on to enter at different price levels. This is scaling in.

Scaling in refers to the process of entering a trade after intervals. That means you enter a trade with just a fraction of the total capital you intend to reserve for that particular trade. Afterward, you observe how price action behaves. Once the price action behaves as intended, you can plan more entries and take full advantage of price moving in your favor. This is the scaling in trading strategy. 

Example

Let’s try to understand it through an example. Let’s suppose that the BTC price begins to rise after a downtrend. What you have to do is never invest your entire money in one go. Conversely, you can begin with just a fraction of your capital. Let’s say you want to invest $60,000. Initially, you should invest $10,000 after the trend shows signs of reversal. Afterward, you can plan your second entry when the BTC’s uptrend resumes after a short pullback. Similarly, you can invest the entire sum after making sure that the price is heading in your favorable direction. 

Advantages of scale in technique 

There are two possible outcomes when you enter a trade. You’ll either win or lose. If the price moves in an unfavorable direction, you’ll incur losses or vice versa. Therefore, you try to minimize losses if the price doesn’t move in the direction you anticipated. That means you can minimize risk through scaling in. This is the major advantage of scale in trade management techniques.

Secondly, scaling in gives you much-needed peace of mind as you don’t risk your entire position. Moreover, it also puts you at ease as this strategy enables you not to rest your entire wallet on your judgment. Rather you confirm the trend before going all in. 

Thirdly, you can also put in more money than intended by using this technique. How so? Because once your initial entry turns out to be the correct move, you can go on to put more capital on an incremental basis. That said, scale in technique empowers you to maximize your overall gains in trading.

Risks of scale in technique

The major risk associated with scaling in is that you end up putting significant money at risk. The trade may go against you despite the price being heading in your favorite direction. As trading is a risky arena, any news event may disrupt an ongoing trend, even a strong trend. So, more open positions mean you’ll potentially lose more. 

Another point to note is that you enter a trade on multiple points as the trend develops in your favorable direction. That means you may end up entering trade closer to the end of the trend. That said, it is always important to apply the best risk management and money management strategies. Moreover, always be cautious when entering into a trade when a trend has already been established for a while.

Scale out

Scale out is the second type of scaling in trading. It is similar to scale in but on the opposite side as it involves getting out of open positions. What is scaling out? Again, let’s try to understand through a scenario. 

Suppose you want to exit a profitable trade as you have reached your profit target. However, you don’t want to exit the trade all at once as you are anticipating that the trend may continue. Now, what should be your plan of action? Should you exit all at once and lose potential profit? No, it shouldn’t be your plan of action. Your plan of action should be the one that scaling out suggests. You can exit trades at different levels. In other words, you can gradually close some positions to make a profit while keeping some positions open to capitalize on further favorable price movement. 

So, scaling out refers to the process of exiting a trade at different levels. That means you exit a trade gradually by locking profits at different price levels. You keep some positions open to take advantage of the price heading further in your favorable direction. Therefore, the scale out strategy of scaling in trading enables you never to miss out on profit above your initial target. As the price action continues to behave as intended, you can plan more and more exits to take full advantage of price moving in your favor. This is scaling out in trading. 

Example

Now, let’s try to understand what is the scale out strategy in scaling in trading. Again, suppose BTC’s price is moving in your favorable direction and it reaches your profit target. However, you anticipate that the price may go further upwards. You don’t want to exit your position all at once. So, what do you do? You plan to exit your position at different price levels. 

Suppose you decide to exit on four different price levels. So, you use a scale out strategy. You can exit by locking some profit at your profit target. Afterward, you can plan second, third, and fourth exits at different levels to maximize your overall profit.

Advantages and disadvantages of scale out technique

The main advantage of the scale out technique in scaling in trading is profit maximization. It allows traders to maximize gains when prices continue to rise in a favorable direction. 

On the other hand, the main disadvantage of the scale out strategy is that it makes traders sell too early. So, it may reduce overall profit if the price continues to rise after you scale out. Moreover, this strategy is also suitable for the trending market. It doesn’t work when the market moves sideways. 

The wrap-up

Scaling in trading is a very useful strategy as it enables traders to minimize risk while maximizing overall profit. There are two types of scaling in trading. The first one is scaling in and the second is scaling out. Scaling in means entering a trade on different price levels to limit overall risk. Conversely, scaling out refers to the technique of exiting your trade gradually. That means you don’t exit the trade all at once even when your first profit target is met. Rather the strategy requires you to keep some of your positions open to maximize gains when the price continues to rise in your favorable direction. 

Although scaling in trading is a good strategy, it also has some risks. Therefore, it is important to remain vigilant. Moreover, this strategy may also lead you to take too much risk that can seriously harm your portfolio. Simply put, proceed with great caution as trading is a risky game and you can never know what may happen in the next few moments. 

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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