Scaling In and Out of a Position Gives You the Needed Flexibility to Manage a Forex Trade

Illustration: Euro Currency

The ideal way to enter into a trade is to do it gradually. This is also known as Scaling In A Position. In the same manner, it is best to exit the trade in a gradual manner. This is also known as Scaling Out Of A Position. Trying to figure out the perfect entry and exit is only going to make you more confused and hinder you in making your trading decisions. There is no perfect entry or exit. You will never be able to catch the top or the bottom at the precise moment.

Let’s make it clear with an example. Suppose, you are trading EUR/USD. If you have been following the currency market, EUR/USD is hovering at its lowest level of 1.2700 in 16 months in the last few days. It can fall further if ECB decides on further interest rate cuts. Your fundamental and technical analysis is strongly suggesting that EUR/USD pair will go down more.

So, you decide to go short. One approach is to enter into a short position with 1 standard lot single entry straight away and say put a stop loss of 50 pips at 1.2750. If instead of EUR/USD rate going down, suppose, the rate starts climbing and climbs more than 50 pips to say 1.2760, your stop loss will be hit and you will be out of the trade.

Suppose, EUR/USD rate climbs up by 100 pips to 1.2800 then again starts dropping and drops by more than 200 pips. You are not happy as you made a wrong entry decision. If you had entered into a trade gradually, you would have been still in the trade. So, the correct and much better approach is to enter the market gradually.

This is how you should do it. You plan to trade a total lot size of 1, break this lot into 5 small lots of 0.2 lot each. First enter into a short trade at 1.2700 with 0.2 lot and stop loss of 50 pips at 1.2750. When you hit the stop loss and if your technical analysis is still strongly suggesting that EUR/USD will eventually fall, you should enter another 0.2 at 1.2760 with stop loss of 50 pips at 1.2810.

When price action reaches 1.2800 and starts dropping enter another 0.2 lot at 1.2750 and then another at 1.2700 and the last 0.2 lot at 1.2650. This is also known as Scaling in technical terms. With experience you will see that this scaling in and out of a position is a much better approach and will give you the flexibility to manage your trade in a much better manner no matter in which direction the market moves.

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