Scaling In and Scaling Out of Trades
© Jenny Rollo
Scaling in is the process of building a position in a stock through a series of trades. It is different from pyramiding as follows. Suppose your normal position size is 2% of capital on each trade. Scaling in might achieve this in two purchases of 1% each, or four purchases of 0.5% each. If the trade then goes significantly in your favor, you may decide to pyramid an additional 1% or 2% of capital, to ‘ride the winner’.
What is the purpose of scaling into a trade? Some traders look for assurance that the trade is moving in the right direction before fully committing – if it’s moving in the right direction they buy more, but if the trade is going against them they hold off, happy they are losing less!
Listen to what Jessie Livermore had to say in Reminiscences of a Stock Operator: “This describes what I may call my system for placing my bets. It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet, as it were. If a man trades in the way I have described, he will always be in the position of being able to cash in on the big bet.”
Some traders also prefer to scale out of a favorable position in two or three trades, thereby at least guaranteeing that they will lock in some profit.