What Is Scaling In and Scaling Out in Trading?

There are several trade management actions we can take. Two of them are scaling in and scaling out:

• Scaling in: This means increasing your position size in a trade that's already open.
• Scaling out: This means reducing your position size without exiting the trade.

What Is Scaling In and Scaling Out?

When you have a trade opportunity, there’s so much more to it than just entering and exiting the trade. What about everything in between? That’s what we call trade management.

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There are many things you can do with a trade you’ve got open, but we’re going to focus on scaling in and scaling out:

• Scaling in means increasing your position size on a trade you’ve already got open.
• Scaling out is the opposite, you’re reducing your position size on a trade without exiting.

With all else being equal, this means you’re either increasing or decreasing the amount you have at risk.

When you scale out of a trade, you can think of this as partially closing the trade. In fact, some traders use the term “partials” instead of scaling out. When you do this, you’re deciding you want to keep the trade open, but for whatever reason you’re deciding you want to reduce it.

This could happen either in a profit or in a loss:

• If you scale out when you’re in a profit, you’re banking some profit.
• If you scale out in a loss, you’re turning part of the trade from a running loss into an actual loss.

You might choose to do this for risk management purposes. If the riskiness of the situation has changed in some way (either because the probabilities have shifted, or the potential outcomes are no longer favourable enough and you have negative expectancy), you’ll scale out to reduce the risk on future price moves.

Alternatively, you might do this for trading psychology reasons. Many traders feel the urge to bank profits as soon as they have them, often due to a combination of loss aversion and the need for instant gratification. But if you just scale out part of the trade, it satisfies that need for instant gratification, and might allow you to hold the rest of the trade longer. After all, the key to great trading is to cut your losses and let your profits run. This can be a good way to let those profits run further.

On the other hand, if you’re scaling into a trade for logical reasons, it’ll usually be because the opportunity has developed in some way that makes it favourable to increase the position size. Maybe the trade has moved massively into profit, and you’re willing to be more aggressive by increasing the position size and sacrificing a bit more of the profit you’ve already made. A higher position size means bigger profits, but keep in mind it can also mean bigger losses.

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Another example could be if you’ve moved your stop loss closer to the current price, which means the percentage you have at risk is now much lower. As a result, you can safely increase your position size without increasing the amount you were happy to risk on the opportunity.

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How much you choose to scale in or out will depend on the opportunity and what sort of percentage at risk you’re happy with. But I’d recommend taking it easy to begin with and not being overly aggressive with it. It’s a common mistake from beginner traders to get overeager and scale into trades all the time. But eventually the market turns against them and they take a big hit.

Likewise, a typical beginner mistake is to scale into losing positions. They do this hoping to reduce their average entry price, which makes it easier to get back to break even. But it also means I have a higher amount at risk on a trade that might be going against me.

To really make the most of scaling in and out, it’s important to understand trade expectancy and probabilities.