Scaling In - Positives And Negatives
To Scale In or Not to Scale In… That is The Question…
MONEY. MONEY. MONEY. That’s the game we play. Money Management is a crucial part of a trading system. Often this part of a system is over-looked and ignored but Money Management alone can be the pivot of a trader’s career from unprofitable to profitable. I don’t blame you! Money Management can be Unsexy, the veggies on your plate if you will and unfortunately for some… MOM KNOWS BEST.
Today we cover Scaling IN and OUT of positions. It’s Important to note the difference (VERY) and what the pros and cons of each are – READ ON TO FIND OUT
On the left side of the ring, we have “Scaling In” which means to add to an existing position/s. In whatever we do as traders we need to identify the risk. If we can’t control risk, we don’t play. Although I won’t give you any specific technique to scale in because there are many ways to scale in, you will realize the approach necessary to decide if scaling in fits your system and personality.
Here’s how NOT to Scale In: A LONG (Buy) Trade is going against you. You deem the market to be at a better price to buy than your entry was because there is just absolutely no way your analysis is wrong, so you place ANOTHER LONG and add to your existing Long. DO NOT EVER… EVER Do that.
That is called Averaging IN, a technique used by BIG BANKS who have much more money than you to accumulate a large position without spooking the market AKA Retail Suicide. What you want to do is add to a position that is already in moving in your favor. WHY? Because the market is proving to you that “hey, you might be right” TIP: Always Decrease your lot size as you add positions. Less risk means taking a smaller “L” should the market decide to spit in your face.
Why Scale In? To Increase your Risk vs. Reward ratio (RR). Scaling in PROPERLY means maintaining roughly the same risk while carrying a bigger size in the market. Naturally, that might excite some of you but this is not the easiest thing to pull off. Which is why you need to assess your situation. If you have a low win ratio. Adding more risk might be the last thing you want to do. If you have a low Maximum favorable excursion (MFE) which means when you are right, price usually doesn’t go that far then You might want to reconsider, or at the very least back-test the probability of you losing all of your retirement money.
Why Not Scale In? Avoid potentially unnecessary risk. As soon as you scale into a trade you have forgone an opportunity to take risk off and although you might get an opportunity to take it off again, there’s no guarantee you will. This is why it is critical to assess if you should add to your positions and if you can stomach unnecessary risk being realized.
You will also want to pay attention to your margin. Carrying a bigger size on your positions means you might have to pass on opportunities simply because you can’t afford them. Unless all of your added positions are in high profit then you’ll have unrealized profit as margin… try not to shoot yourself in the face.
I stand to be corrected but I don’t think there is a wrong way to do this. To scale out means to Take profit on a PIECE of your existing position/s. Personally, I think this is it right here. This is your cheat code. This is the reason your chances to make money consistently are much higher than uncle’s are at the casinos. Like most things in trading, there are many ways to skin a cat, slice a pig, roll the dice… you get my point.
On your journeys as a trader looking for the pot of gold, you might have heard an adage that says “No one ever went broke taking a profit” But some have become very wealthy doing just that PROPERLY. — You’ll understand as you continue.
Why Scale-Out? To Minimize Risk. Whether you’re winning or losing, taking some of your position off will decrease your risk. Your Job is to decrease Risk in the most profitable way. If you scale out of a loser, your initial risk will never be realized. If you scale out of a winner, you decrease your risk by whatever portion you just took off plus you took some profit which, if the market goes against you, decreases your overall risk EVEN MORE.
TO ACTIVATE CHEAT CODE: Scale-out of your losers, Take some profit off of your winners and let the rest run.
This approach I would argue is even harder to do than scaling in. We’re human beings and hope has taken us through great tribulations as a species and so it’s only natural to think “Why am I decreasing my lot size as price moves in my favor”, “I’m leaving profit on the table if I decrease my size” and you are not alone. You are not the first person to want to grab every dollar you can from the market. If you can train your mind to Focus on eliminating risk you will be way better off than most. The hardest part is the psychological aspect of it. But if you get it right… You can thank me later.