Forex Trading Strategies: Scaling
Scaling is a forex trading term that refers to adding or removing units from an open position. If the outcome of your original trade changes, then you can add or remove units from it. It can be your starting strategy or spot strategy.
For example, there has been a significant retracement in the value EUR/USD forex trading pair, and your view is that there is going to be an upside. Let’s say you have $100,000 USD to invest. But since you don’t know how deep the retracement be, you decide to deploy $10,000 USD at 10 difference strike prices to have a better average purchase price. This is called scaling in.
Correct scaling may help to reduce risk or maximize profit potential. Surely, you should also be aware of the potential downside of adding or removing units from your existing position.
Elements of consideration before scaling:
Scaling is a double-edged sword, and can hit you either way. Hence, it is worth noting below points before starting to scale:
Stops: In any trade, it is important to understand risk and amount associated with trade, which you are comfortable with. Use stop-losses, to reduce the amount of risk.
Be sure: Before scaling in, be 100% sure about the trends. As scaling on the wrong side may end up with huge monetary losses. For instance, if you have entered in a position for an upward move, but for some reason, the market moves in another direction, you should refrain from scaling or else it will cumulate your losses to beyond the point of return.
Estimate: Estimate the correct size and price, of adding or removing position before you start your trade. Most of the time, abrupt decision causes serious losses.
See the change: Scaling-in (adding units to existing position) best works in trending market, while range bound market provides Scaling-out (removing units from the existing position) opportunities.
Scaling-in works really well if you have spotted the right trend and that can add sizable profit to your wallet. At the same time, wrong trend spotting may incur huge losses. Scaling –out is preferred when the markets are range-bound. You buy more units at the start of your trade and remove units in phases, as the uncertainty of range prevails.