Lesson 2: What Is Scaling in Trading?

Now that you know more about calculating your position size, you can begin learning about more creative and safer ways to trade. 

If you’re simultaneously trading multiple position sizes, an innovative way of managing risks is by “scaling” into and out of positions. 

In this lesson, you’ll learn what scaling means in forex trading and how to practice this in your trades. 

Lesson Highlights 

• Scaling is a financial trading practice where you gradually add or remove units from your original open position. 
• Adding more units into your open position is known as scaling in while removing units is referred to as scaling out. 
• One of the primary advantages of scaling is the psychological security it gives traders. 
• Scaling out of positions lets you lock in profits. 
• Scaling out reduces your maximum potential profits in exchange for a “risk-free” trade. 
• Scaling in works best in trending markets. 
• It’s highly recommended to place trailing stop-losses when adding into a position. 

What Is Scaling in Forex? 

In forex, scaling refers to adding or removing units from your initial open position. You’re scaling in when you add units to your open position and scaling out when you remove them. 

Scaling is a great way to simultaneously manage trading risks, lock in profits, and maximize your potential returns. 

Advantage of Scaling 

There is no doubt that scaling is beneficial to traders. It can help secure your profits and prevent you from suffering large losses. 

However, one of the main benefits you can gain from scaling is not financial in nature but psychological. Scaling can give you a sense of security and remove the urge to try making the perfect market entry or exit. 

Using this approach, you can break down a large position and position its portions across several points where support/resistance, reversals, breakouts, etc., can occur. 

Combined with trailing stops, you can potentially keep locking on larger profits and protect these from unexpected price reversals. 

Disadvantage of Scaling 

While advantageous, scaling still has its share of drawbacks. 

One of its disadvantages is that it increases your trading costs. As scaling entails breaking down a large position into several smaller ones, you’ll inadvertently have to pay more transaction costs (e.g., spreads and fees). 

Meanwhile, scaling out can decrease your potential earnings as you remove some of your open positions. 

Scaling Out of Positions 

Scaling out is counted among the possible ways to trade with minimal risks. It works by reducing your market exposure through the incremental removal of your open positions. 

When used together with trailing stops, scaling out helps you lock in profits. 

How It Works: Scaling Out of EUR/USD 

To better understand how scaling out works, look at the example below. 

Pietro has USD 10,000.00 in his trading account. He shorts 10,000 units of EUR/USD at an exchange rate of 1.3000. 

He places a stop-loss order at 1.3100 and a take-profit order at 300 pips below his entry at 1.2700. 

Since Pietro has 10,000 units of EUR/USD (with a USD 1 pip value) and a 100-pip stop, his total risk is USD 100, or 1% of his account. 

The next day, the EUR/USD moved down to 1.2900 – 100 pips in Pietro’s favor. This means Pietro now has a total profit of $100, or a 1% gain. 

On the same day, the US government released its inflation data with results that may weaken the USD in the short term. 

Pietro is unsure how long the EUR/USD will keep going down. He decides to lock in some of his profits by closing half his position and buying 5,000 units of EUR/USD at the 1.2900 exchange rate. 

With 5,000 units of EUR/USD and a USD 0.50 per 1 pip value, Pietro locked in his 100-pip profit worth USD 50 (100 pips * USD 0.50 = USD 50). 

Pietro’s move leaves him with an open position of 5,000 units short EUR/USD at 1.3000. At this point, he can simply adjust his stop-loss to breakeven (1.3000) and effectively trade “risk-free.” 

If the EUR/USD pair moves back higher, Pietro’s adjusted stop position will close his remaining position at 1.3000 with no losses. If the pair continues its downward movement, he can ride the trend for more profits. 

In the example above, scaling out of his initial position allowed Pietro to lock in some of his profits. However, it also reduced the maximum profit he originally stood to earn. 

When you scale out, you’re trading some of your potential profits for the peace of mind and security that a “risk-free” trade brings. 

Scaling In Positions 

Now that you’re familiar with the concept of scaling out, it’s time you learn about scaling in. 

You can scale in a trade regardless of whether it’s in a losing or winning position. 

However, scaling into a losing position is NOT ADVISABLE for less experienced traders. 

For this reason, this discussion on scaling in will focus on how you can scale in a winning position. 

Scaling in can still be risky, even if you’re scaling into a winning position. Some of the risks you face when scaling in trades include: 

• Increased exposure to market fluctuations 
• Vulnerability to sudden reversal 
• Potentially magnified losses if scaling in is not executed properly 

If you want to minimize the risks associated with scaling in, it’s vital to strictly follow a set of rules when trading. These include: 

1. Have predetermined entry levels for additional units. 
2. ALWAYS calculate your risk with the additional units included. 
3. ALWAYS use a trailing stop-loss to keep your growing position within comfortable risk parameters. 

These are only general rules. You can always add more depending on your trading style, risk tolerance, and current market conditions. 

How It Works: Scaling In EUR/USD 

To better see how scaling in position works, take a look at another trading example. 

Pietro is planning to trade the EUR/USD pair again. He closely observes the currency pair and, following a short market consolidation, predicts that traders will cause the EUR/USD to climb higher. 

Pietro decides to buy euros against the USD at 1.2700. 

He sees that the recent consolidation didn’t go below 1.2650 and determines that it’s a good choice to place his stop just below it at 1.2600. 

Pietro also believes that 1.3000 is a psychologically significant resistance level and decides to place his take-profit here. 

Pietro now has a 100-pip stop and a 300-pip target profit, or a 1:3 risk-to-reward ratio. 

With a $10,000 starting account balance, Pietro’s initial risk will be $100 ($10,000 * 0.01). Using these figures, Pietro determines his position size to be 10,000 units. He will add 10,000 more units every 100 pips and place a trailing stop every 100 pips. 

The image below shows a step-by-step look at the change in Pietro’s risk-and-reward with every addition. 

Pietro’s trade is a simplified example of how scaling in works and shows a basic technique of safely adding more units to a winning position. 

It’s best to remember that scaling in may not be the best strategy for every market environment. Generally, this approach works best with trending markets or strong intraday movements. 

Scaling in involves adding to your existing position, and it eats up your free margin. Consider this before deciding whether to scale in your position.