Hello and welcome to another edition of the bulls vs the bears. Last week we started our scaling series by learning how to scale in on a forex trade. Now I get the feeling the question on somebody’s mind is…”I Have Scaled In My Trading Position…..Now How Do I Scale Out?” Well not to worry! We are going to learn how to scale out of trading positions. Since we’ve scaled in on our trades, it’s only sensible that we scale out. right?
Scaling out helps reduce your risk and protects you from being obliterated by the market-regardless of whether you are in a winning or losing trade. When you are scaling out, back it up with trailing stops. With this added security, you can lock ion your profits and make your trade risk-free. Now if you are a bit rusty on your trailing stops look up Forex Trading Basics – Top To Bottom Part II. You will learn about various market orders including the trailing stop. You may want to check out Part I while you’re at it.
Now let me explain what’s happening here. You have a $10000 trading account and you decide to trade the EUR/USD pair. You say to yourself “Let me sell 5000 units at 1.3000.” You place your trail stop at.1.3100 and your profit target 300 pips below your entry at 1.2700. For this trade you risk $100.
A few days later EUR?USD dips to 1.2900. And as predicted, the trade moves 100 pips in your favor. Not to mention the fact that you make a nice $100 profit. Sounds great. Doesn’t it? Unfortunately bad news starts filtering that the U.SD(U.S.Dollar)may take a dip in the future. You then say to yourself”Let me lock in my profits. Because I’m not sure I can the USD can slide any further.” So you decide to close half of your trading position buying 6000 units at 1.2900. You then lock in $50 in profits at the exchange rate of 1.2900.(100 pips*0.50=$50).
So you now have an open position of 5000 units selling at 1.3000. Meaning you can now adjust your trailing stop to breakeven(1.3000) to make your trade risk-free. If the EUR/USD pair climb back up to hit your adjusted trailing stop 1.3000, just close your trading position without incurring a loss. But if the pair dips any lower, just rack up all the profits til your heart’s content.
Now supposing you still had 10000 units and EUR/USD dips to 1.2700, and you caught 300 pips in the process. Then your profits will be a cool $300. But since you closed half of that position you will only get $150. Add $150 to the previous $50 and you have a neat total of $200.
What you need to understand is that it’s entirely up to you if you want to leave some profits on the table. You just need to weigh the pros and cons of your strategy
Now Let’s me show you a little visual illustration of this scaling out example
Now here is the graph showing you the various times that you have to scale out. The question you need to ask yourself is”Do I push for more profits and risk huge losses? or Do I want to sleep better at night knowing that I have locked in at least half of these profits?” It’s a tough question, but one that needs to be answered for your own sanity. Also there is always that possibility that the market could surge beyond your profit target and add more cash to your trading account.
There is so much to think about when tweaking your trading positions. But with more practice you should be able to scale out your trading positions with flawless ease.
That’s a wrap for “I Have Scaled In My Trading Position…..Now How Do I Scale Out? ” Next week we’ll continue our scaling series by touching on how to expand your winning position.
Til next time take care.
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