Now let’s talk about a major aspect of trade management that needs discussing:  Whether to scale or not.

What the Heck is “Scaling”?

Scaling in essence means breaking up your order into separate pieces or “trades” within the dynamic of the entire move you are trading.  There are different forms, but the three most common forms of scaling are:

Scaling Out:  Closing portions of your trade as the trade progresses.

For example, closing half of the trade when it reaches a certain profit level.

It is essentially the process of “banking” portions of the trade while allowing the rest to continue to stay in the market.  This can ensure at least some of the trade is kept as profits and can potentially take the pressure off the rest of the trade.

This is BY FAR the most common form of scaling and interestingly enough the most debated over whether it should be done or not (more on this later)

Pyramiding:  This is where you add more to your trade as it moves INTO PROFIT.  This can essentially multiply the return for the same pip gain as you would from one order.  Keep in mind though, that as you add more open orders, you increase the money lost when the market moves against you and can potentially lead to a ramping up of risk.  If done correctly however, you can give yourself the opportunity to make much more while either keeping your risk the same or reducing it!  If you don’t place the subsequent order until you have moved the original trade to b/e or better, you are never risking more than the newest order.

This can be continued on and on as price moves more in your favor.  The “trend is your friend” has a corollary here:  ”It’s easier to win if you’re already winning”.  I have found trades that go in your favor enough to add positions to seem to win a whole lot more than trades that move against you for a while.  Seems obvious right??  But this form of scaling is only used by the most savvy traders and hardly spoken about elsewhere.  Most people wouldn’t consider this even though it is much better in my opinion than the next one.

Dollar-Cost Averaging:  This is where you add to an order as price MOVES AGAINST you.  As you go into drawdown, you attempt to make it easier to become overall profitable by adding additional orders while your original order is losing.  As the market returns to your favor (IF it does), it doesn’t have to go all the way back to b/e on your original order for you to be in profit overall if the second order is the same size as the first.  Keep in mind though, that this is riskier than pyramiding because you are already LOSING when you add more lots and there is no way to nullify risk on the first order before placing the second.

I rarely employ this technique, but it does have a place.  If you SPLIT your original order into two pieces because you are not sure WHICH area might be “the” area on a pullback and attempt to catch at least one trade at the first location while leaving the door open to take a second trade if the market continues against you, you have not really risked anything more than if you had taken the whole order at the first or second area.  Again, use caution with this form of scaling.  Most of the time, it’s just better to take the loss from one trade and moveon.com and find a better trade elsewhere.

The “Debate”:  The most contested issue of scaling generally has to do with scaling out or “multi-level profit taking”.

One side of the argument says that it is more beneficial psychologically to take money off the table and leave the rest of the order to run and not worry about it, giving opportunity for out-sized risk-free gains instead of obsessing over watching the number of pips gained ebb and flow over time and potentially watching a good winner turn into a b/e trade or worse and never making anything from your winning trade.  The other side to this argument is the fact that when you scale out, it makes the rest of your order have to go much further to produce the same gains as if you would have just left the entire order to run but not go as far.  That being said, I love our own Marc Walton’s “You can’t feed your family on pips” saying.  Sure, you might make more if you let it run and it actually goes further, but if it reverses all the way back to the stop at break-even or worse, you would probably wish you had taken some off.

Example:  You take 50% of your trade at +50 pips and leave the rest to run.  Your trade would have to go DOUBLE the distance just to make 50% more money.  That means by taking 50% off, you need to get 100 pips out of the second half of the trade to equate to the gain of just letting the whole thing run to +75 pips.
Same situation could happen and you put the stop at +10 pips when you reach +50 pips the trade goes back to  after closing half.  In this case, you make THREE TIMES more by scaling out half rather than letting the trade slide back in its entirety to +10.

The “Verdict”:  As far as I’m concerned, I don’t have a definitive answer.  I honestly feel that both sides have a great argument.  You can see from the examples above that depending on the dynamics of the particular trade and order setup, either way could be more profitable.  One great way to test this theory/technique is to use the trade manager I recommended last month. This way you can test up to 10 different options with your trades.

• Its VERY easy to use
• You can run up to 10 different mt4 platforms through it at the same time, just by adding the entry price!
• Test on demo whether you would make more money letting trades run
• or using a trailing stop
• or fixed stop
• Multiple stop loss moves. So initial move stop to entry after xx pips, followed by stepped or up to 6 trailing stops!
• Auto scale out (take profit) of trades up to 5 times
• Its CHEAP! Other models I have seen range from $500 to over $1000, so this is peanuts by comparison

The beauty of this trade manager is that takes all the emotion out of your trading, you can quite literally place the trades and walk away. Most newbie traders spoil winning trades by becoming nervous or greedy. I know a friend of mine whose boss thinks he is incontinent as he is always in the toilet checking his trades on his mobile phone!

Here is the link to the article that explains the benefits and features of the trade manager in more detail CLICK HERE

I hope that this gets you thinking about the pros and cons of scaling in and out of trades.  We will discuss pyramiding techniques next week as this is something that if done correctly, is a real way to leverage winning trades and potentially make them EXPLODE.  I have seen pyramiding turn a 200 pip move into 1000+ overall pips for the account.  The beauty of it is that if done correctly, you NEVER have to violate your initial risk of 2% per order even if you have 10 trades open.  The only risk is really guaranteed gains, the more you pyramid, the more you risk b/e overall on a reversal but it doesn’t have to be that way either.  All depends on structure.  More on this soon!!

regards

Author: Omar Eltoukhy