Risk management is a huge part of trading; and since one of the few factors in a trader’s control is the size of the lot that they are trading, the topic of scaling in & scaling out positions certainly warrants attention.

This article will explain what scaling in & scaling out is, how to do it, and in which circumstances traders may want to look to ‘scaling in & scaling out’ to positions.


What is scaling in?

Scaling in is the process of entering a trade in pieces as opposed to putting the entire position on in one entry.

A trader that is looking to scale into a trade might break their total position size in to quarters, halves, or any other division that they feel might let them take a more calculated approach to putting on a trade.

Let’s say, for instance, that a trader was looking to take EURUSD up to 1.3300, but was afraid of a near-term movement against them. As opposed to putting on the entire trade right up front, the trader can look to ‘scale in’ to the position. The picture below will illustrate further:
Scaling in every 100 pips


If the trader wants their total position size to be 100k, they can choose to open 25k every 100 pips that EURUSD moves up. So, our trader can open 20k to start the position when price is at 1.2900, and once moving up to 1.3000 our trader can put on another 25k. This has the added benefit of allowing the gains in the first part of the position to assist in financing the second.

After price moves up to 1.3200, the trader takes on another 25k, and again at 1.3200. Once price hits 1.3300, the trader can close the position at a strong profit.

Why Scale In?

In the above example, let’s assume our traders stop loss was at 1.2800 when they opened their initial EURUSD position at 1.2900. But instead of our trader scaling in, let’s assume they opened the full lot at the outset of the trade, and this time, unfortunately - the trade didn’t work for them as EURUSD ran directly to their stop at 1.2900. This means our trader takes a loss of $1,000 (100 pips X $10 per pip (100k lot)).

If our trader instead looked to enter using a scale-in approach the trader would have a much more moderate loss of $250 (100 pips X $2.50 per pip (25k lot)).

And the trader using a scale-in approach could have used trade management to assist in the risk management of the trade if the position moves in their favor.

Let’s say that EURUSD moved up to 1.3000 shortly after our trader entered, but then reversed moving down to 1.2800. Once again, if our trader had opened the entire position up front they are faced with a $1,000 loss. But to the trader that had scaled in, adding a second part of the lot at 1.3000 - the loss would, once again, be much smaller.

If the trader’s stop remained at 1.2900 while scaling in, the total loss on the position would be $600 ($200 for the first 20k scale, and $400 for the second (200 pip loss X $2 per pip)).

But why would the trader be required to leave their stop at 1.2900 after the pair had moved in their favor 100 pips on the initial part of the lot? Many traders will use this type of movement as an opportunity to move their stop up to break-even, in an effort to remove their initial risk on the trade.

So, as EURUSD moved up to 1.3000, the trader can open the second part of the lot, and also adjust the stop on the first part of the lot to 1.3000 from 1.2900. That way, if price reverses against the trader, they can get stopped out at break-even on the first part of the lot, taking a loss on only the second part of the position.

This process can be continually instituted on all 4 parts of the scale-in approach, so that by the time the trader enters their final 25k of the position at 1.3200, stops have been moved to break-even on the previous 3 parts of the position, and the trader only carries, at maximum - $200 of risk on the position (assuming a 100 pip stop on any of the 4 legs of the position at 25k per leg).

When to scale in?

Traders often prefer to scale in when they are looking for a large move in a currency pair, but want to use a more risk-sensitive approach than putting on the entire lot right up front. The downside to scaling in is that you won’t get the entire move for the entire position.

Whereas in our above example, the trader would be able to look for 500 pips at $10 per pip, a trader scaling in would only be looking for 500 pips on the first part of the position, with the second part seeking 400 pips, the 3rd looking for 300 pips, the 4th seeking 200 pips, and the fifth and final part of the lot looking for 100 pips. But keep in mind, scaling in also allowed the trader to take on far less risk during the trade than had the entire position been initiated right up front.

Scale Out

Why Would Traders Scale Out of Positions?

The primary reason that traders would look to scale out of positions is greed; and to the trader's line - this can be a good thing.

Quite frankly, we never know how long a trend might continue, or how many pips might be generated from a single position. Scaling out allows the trader to observe the market, removing parts of the position as the market moves in their favor. Traders will also commonly look to utilize break-even stops when using a scale-out approach in order to remove their initial risk.

For example, let’s say that a trader is opening a trade ahead of NFP, or Non-Farm Payrolls, and is looking at entering the position with 50 pips of risk.

As a priority - they know they want to avoid The Number One Mistake that FX Traders Make, so they are looking for an absolute minimum of 50 pips on the reward side of the trade.

If they decide to use a 1-to-1 risk-to-reward ratio, the trader is likely looking at one of two outcomes: Either a 50 pip stop, or a 50 pip limit. But let’s look at this same situation from the vantage point of the trader that wants to scale out of their position: If the market moves in their direction 50 pips, they can look to ‘scale out’ of ¼ of the position, and then they can move their stop to break-even; so worst case scenario, of price reverses against them - they are out of the remaining ¾ of the trade at no gain, and no loss.

But what if the market keeps moving in their direction? This is where things get fun for the trader using a scale out approach, as our trader can essentially close additional pieces of the position as price continues to move in their favor.

If EURUSD moves up 100 pips, the trader can choose to take off another ¼ of the position, and perhaps even adjust their break-even stop deeper in the money in order to lock in additional gains. If price moves another 50 pips, they can look to scale out of another ¼ of the position. The picture below illustrates further:
Scaling out allows additional return, with no additional risk if stops are adjusted


The primary benefit of this type of trade management is that if the EURUSD is going to embark upon a big move, our trader can potentially capture a much larger portion of this move than if they had settled for a 50 pip limit on the trade.

When to Scale-Out?

Scaling out works best with trend and/or breakout market conditions.

With ranges, support and resistance is often well-defined; and if price is going to test resistance (in the case of long positions), or support (in the case of short positions), then why should traders cut their potential gains short by taking profits any sooner on any parts of the lot?

In trending, or breakout markets - prices are moving with a bias in one direction. This increases volatility, as the faster price moves in one direction - the higher the probability of a reversal in the opposite direction. These reversals can quickly wipe out gains, which is one of the reasons that a trailing stop can be such a beneficial tool for traders using these trade management strategies.

As the market moves in the trader’s favor - they can look to close additional pieces of the position in an effort to grasp more gain than they could have initially hoped for.