Scaling In — a Good Alternative to Single Entry in Forex?

Almost a month ago I’ve discussed a technique called “partial profit taking” and its viability in Forex. Another name for this technique is “scaling out” as it allows a trader to scale the exit from his or her position. Today, I’d like to talk about “scaling in” — a technique that’s used to enter a position at more than one entry point before closing it.
Details
To easily understand the concept of scaling in, let’s look at the following example: a trader decides to buy 0.5 lot of EUR/USD at 1.3064, expecting that it will go up, then he buys another 0.5 lot at 1.3090 and, finally, scales in for the third time for another 0.5 standard lot at 1.3100. The position is then closed with profit at 1.3150. The resulting entry price of this 1.5 lot position was ~1.308467, which means that the end profit was $97.99.
Was it a good idea to increase the profitable position’s size in the case of the above example? Yes, surely. Considering that you already had a position entered earlier, if you’ve seen another entry signal at higher price level, it was a totally justified order to enter with some more capital. But is it always so? Is partial entry a technique that should be widely used with any Forex trading strategy? To answer this question we’ll have to review two entirely different scenarios of scaling in — scaling in at a better price (increasing volume of a losing position) and scaling in at a worse price (adding to a winning position).
Adding to Losers
On the one hand, buying even more when the price has fallen (or selling more when it has risen) makes sense — if you were expecting EUR/USD to rise and bought some at 1.3050, then, if you have some extra capital, buying some more at 1.3040 should look like a bargain. In case the currency pair will then move up to your initial target, you’ll end up with more profit than you have expected originally. Additionally, the reward/risk ratio on the second-entry volume would be better if the original stop-loss level is preserved.
On the other hand, increasing the size of the losing position is a straight road to Martingale trading, which will inevitably lead to the trader’s complete loss of the account balance. If the price has moved unfavorable in relation to the initial trading signal, the good chance is that the signal has failed itself or at least has become less reliable. This means that you are adding to a position that now has a lower probability of meeting its target — not a prudent decision for a trader.
In the end, it’s all dependant on the specific case, or to be more exact on some conditions. There’s an advantage in scaling into a losing trade if both of the two following conditions are fulfilled:

  • The original trading signal is still active — only a minor retracement has happened. For example, if the first trade was based on a breach of the chart pattern’s trendline, the retracement shouldn’t go back below the trendline.
  • There should be some new additional capital in your account. Otherwise your new trade will go against your risk management strategy. For example, if your risk tolerance per position is 1% of balance and you entered the initial trade with this risk in mind, you won’t be able to increment the position size without increasing the possible risk, unless your account balance wasn’t increased by some amount.
  • Adding to Winners
    Winning positions are a different story. Adding to a profitable position seems like a good idea — after all, you are adding to a trade that’s already capable of moving in your target direction. Of course, a justified question is why haven’t you entered with the whole volume at the initial entry point? After all, you’d now have much more profit if you did.
    There are only two reasons to use additional entry points for the winning positions:

  • Another trading signal was generated by your trading system. In fact, it shouldn’t be classified as scaling in — it will be a completely new position, albeit in the same direction.
  • New funds were added to the account, so that you could risk more per position than you’ve done initially. This can be a result of a new deposit or some other profitable position closed.
  • Conclusion
    Some traders might believe that using scaling in is some fancy tool to trick the markets and get more profits, but in reality it rarely is such a tool. Scaling in should be used by Forex traders only on limited occasions — in case of a suddenly increased risk tolerance or a new signal for position opening.

    If you have your own opinion on this topic or would like to ask a question about entering at multiple points in Forex trading, feel free to reply using the form below.

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    sixty seven − = sixty six