Scaling-In

You might be thinking that I’m adding to a bad position when I scale into a position.  That’s not the case at all.  Adding to a bad position is when you keep adding more and more risk to a failing trade in an attempt to save your equity.  Scaling-in is quite different.  When I scale-in I actually split my planned risk between 2-3 orders.  Each of these orders is closer to the stop loss, so the size of that trade is bigger.  In many trades, I am able to reduce the risk to zero at the original entry price.  Basically, I’m cost-averaging the position at pre-planned prices.  Please use the following trade and assume an account balance of $10,000.00 for the rest of the exercise:

Buy EURUSD @ 1.5000 SL: 1.4900  Scale2: 1.4950  Scale3: 1.4925  Risk = 2%

As you can see, the original buy order has a 100 pip stop loss, the second buy order (Scale2) has a 50 pip stop loss and the final buy order (Scale3) has a 25 pip stop loss.

Step 1 – Multiply total risk times the account balance.  This will give you the total amount of money that you are risking on this trade.

$10,000.00 * .02 = $200.00

Step 2 – Divide the total amount of money you are risking by the number of entries (in this case we have 3 entries.  The original entry and both scale orders.)  This will give us the amount of money that we want to risk per entry.

$200.00 / 3 = $66.66

Step 3 – Divide the value found in step 2 by the size of each stop loss.  This will give you the amount you wish to risk per pip for each of your buy orders.

Original Entry:  $66.66 / 100 pips stop loss = $0.66

Scale2:  $66.66 / 50 pip stop loss = $1.32

Scale3:  $66.66 / 25 pip stop loss = $2.64

We can now enter all three of our buy orders for this trade.  We’ll enter the following three orders:

1. Buy Limit EURUSD at 1.5000 with a position size of .06 and a stop loss at 1.4900
2. Buy Limit EURUSD at 1.4950 with a position size of .13 and a stop loss at 1.4900
3. Buy Limit EURUSD at 1.4925 with a position size of .26 and a stop loss at 1.4900