Scaling into your trades offers a couple of very big advantages.
- You don’t need to be 100% right on your entries. When scaling in, you don’t need to get your entry level perfect, as you can take a small initial position that limits your loss, but leaves room for you to add more in response to market action.
- You can build a large position while keeping your risk manageable. If your position is in profit, you can use those profits to add more (if you think the trade still has legs) without risking more than your maximum amount.
Both of these things can help you to make more from your trades, as well as help you to manage your trading psychology. Mentally, you might find it a bit easier to trade if you don’t have to be relying on your skill at picking a good entry point.
Don’t be afraid to buy strength
If you are scaling in to a position, it can be tempting to wait for a pull-back in the price, but this will often result in a move being missed. It’s better to get comfortable buying on strength as the price continues its move.
For example if you are using a low volatility breakout entry, you might add your first position on the breakout, your second on the next strong candle, and your third on another.
Here’s an example on the 15 min EUR/AUD.
By adding to your trade, you keep your initial loss small, but can relatively quickly build a sizeable position if the market goes for you.
You can add on a pullback too…
If you get a pullback followed by a bullish candle, or if the price retreats to a support and resistance level, you can use these as good places to scale-in. As mentioned above, the downside is that you could miss out on a move that does not pull back, though you can use this method in combination with the one above to give you lots of good scale-in points.
Here, you can see how the engulfing bearish candles serve as good points to scale-in on this downtrend.
Personally I avoid scaling into a losing trade but here is a method you can use if that style suits you
I am sure there are people that can do it well and make a profit, but I tend to avoid adding to a losing position, unless I have a very specific reason to do so.
The trouble with this approach is that you tend to be adding to the trades that end up being losers, and then fail to capitalize on the trades that end up being winners. You will have the odd trade really go for you and give you a big profit, but that will happen less often making your strategy more difficult to trade. (The more infrequent the winners, the harder a system is to trade mistake free.) If you do want to take this approach, you can use a scale in zone concept.
You allocate a certain zone for your entry of say 30-50 pips for shorter term trades, or a larger zone or longer-term trades.
You then place your initial position, and, as the price hits other important levels in your zone, you can add more. Here is what it looks like:
Scaling-in works on multiple time-frames
You can use this approach on multiple time-frames. Scaling in works on short term trades, or if you are going for long-term moves.
I have used this scaling-in method on everything from 15 minutes to daily charts. Here is an example of how you could scale-in to a longer-term trend on the EURUSD.
Where to put your stop-loss
You have a couple of options here.
- You could have a separate stop-loss on each new scale-in point. If that position is stopped out then you will still have your remaining positions, but if the market turns against you, then your loss on the new position will be limited
- You can combine the position and have one stop-loss. This can be easier to manage, and will mean that if the market pulls back and then goes for you, you won’t get stopped out, meaning your profits will be larger. Conversely, if the market does turn against you, then you will find your gains get eaten up quicker.
Generally I prefer option 2, but it should depend on your conviction on the strength of the move. If you really believe in it, you can take on more risk. If you are not so confident, you might want to quickly get out of the new positions that you have added.
How will you scale-in?
All three of the methods above will work if used correctly, but it is a matter of picking the one that works best for you.
Think about which one could complement your existing entry and exit rules, as well as which process you would find easiest to execute without making mistakes.
If you decide you want to use scaling, make sure you write down the details in your trading plan.
If you are looking for more depth on this topic, I cover it in lesson 14 of the Advanced Forex Course for Smart Traders along with how to build a “risk-free” position.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (https://fxrenew.com/forex-course/). He is a part owner of Forex Signal Provider www.fxrenew.com (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free (https://fxrenew.com/newsletter-sign-up).