Learn Forex – Scaling In and Out of Position
Learn Forex (FXpath.com) – Forex traders always hear about how important risk management is to a successful trading plan. But for the most part, the talk is generally about how one always needs to have a reasonable stop loss in place when forex trading. A relatively neglected aspect of risk management is the concept of scaling in and scaling out of position. The logic behind these two very useful practices is to avoid over-commitment in either entering or exiting a trade.When entering into a currency position, “scaling in” entails starting with a small, fractional position, where the trader can “test the waters.” Only when this small commitment validates the trader’s analysis by gaining profit would additional fractional position(s) be added. In this way, a full commitment to one direction would only be taken on after it is clear that the trend and momentum are in fact in the direction of the trader’s position and analysis.
Similarly, when exiting out of a currency position, profits may progressively be taken on fractions of the overall position. This is called “scaling out”. So, for example, if a trader is holding a full position that is gaining profit, that trader may wish to scale out of the position by taking profits in stages. A third of the position might be closed for a profit at the 30-pip profit level, for example, while the stop loss on the rest of the position might be moved to the breakeven level. After another 30 pips of profit, the second third might be closed for a total of 60 pips profit, with the stop loss on the last third moved to the 30-pip profit level. And finally, the last third might be closed after 90 pips of profit is reached. This method of scaling out allows traders both to run their profits as well as take their profits off the table, without the full commitment of taking full profits at a single price level.
Overall, scaling in and scaling out can be exceptionally effective methods for managing risk and avoiding over-commitment when trading forex.
James Chen, CTA, CMT (bio)
- Click here for my book, Essentials of Foreign Exchange Trading (Wiley).
- Click here for my book, Essentials of Technical Analysis for Financial Markets (Wiley).
- Click here for my video DVD set, High-Probability Trend Following in the Forex Market (FXstreet).
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