Forex lot scaling or position scaling is an advanced concept in position management, often used by experienced traders. Falling under the purview of risk management, there are two kinds of scaling. Scaling In and Scaling Out. In this article, we’ll explain what is forex scaling or position scaling, the concepts behind this and also touch upon the risks of this trading style.
Forex scaling is nothing to do with a trading analysis, but usually comes after and is to do with ‘managing your trade’ or ‘risk exposure’
Scaling In is when a trader adds positions to their trades, or in other words, adds new trades at key price levels.
Scaling Out is the opposite, where in a trader takes profits at key price levels.
Ideally you can scale out when you have either scaled into your trades or when you have opened a trade with a bigger position size (ex: 3 lots or 5 lots).
When is it ideal to scale positions in forex
Forex scaling is ideal when you are riding a trend and want to take full advantage of this. Let’s illustrate this with an example.
Below is the EURUSD chart. As you can see the chart is plotted with the daily support/resistance levels and the pivots.
A normal trader would most likely open a trader near one of the resistance lines with take profits set at the price points that follows. This means, that the trader has only a stop loss and a take profit level. So ideally if you were to go short near 1.3206 with take profit at 1.2908, in effect this would give you a profit of 298 Pips. So if you were to trade with 1 lot, this would give you a profit of $2980.
However, traders who make use of scaling strategies tend to maximize their profits from this same trade of 297 pips.
- Trade 1: Open 1 lot at R3 – 1.3206, with Stop Loss set to 1.3318 and TP set to 1.2908
- Trade 2: Open another 1 lot at R2 – 1.3127, with Stop Loss set to R3 – 1.3206 and TP set to 1.2908
- Trade 3: Open another 1 lot at R1 – 1.2987, with Stop Loss set to 1.3127 and TP set to 1.2908
So from the above trade set up, we have:
- Trade 1: $2980
- Trade 2: $2190
- Trade 3: $790
Based on this lot scaling, the trader would have profited $5960. Note that the total pips moved (from 1.3206 through 1.2908) was only 298 pips. However by making use of lot scaling the trader would have practically doubled their profits.
Scaling out works in the same way. A trader would open bigger positions (2 standard lots for ex) and scale out (close quarter of the position or half the position) at key points in order to lock their profits and practically make their trade risk free towards the final position.
Lot Scaling – Pros and Cons
Lot scaling enables traders to maximize their profits within a trade set up by adding multiple positions during the course of the trade.
Lot scaling doesn’t just involve adding positions but also moving the stops, preferably to break even levels and consequently move the stops to lock in additional pips in profits.
Lot scaling requires constant monitoring of the trade depending on the time frame chosen to trade.
On the flipside, lot scaling increases your exposure to risk. This primarily comes down to how well your trade was planned. Also any sudden moves in the markets could possibly risk all your positions on the single trade.
In a way, lot scaling is akin to ‘putting most (if not all) your eggs in the same basket‘
Is lot scaling right for you?
When it comes to Lot scaling or position scaling, the opinion is highly divided. While some traders prefer to keep it simple others tend to make use of lot scaling in order to maximize their potential. But as you might have realized by now, without good practice and experience, Lot scaling increases your exposure to risk.
Conventional traders usually look down upon traders who scale their positions as being too greedy. However, that being said, in all fairness, if there is a way you can maximize your profits then why not.
Lot scaling is built upon strong foundations of having done a proper analysis of the trade set up and following the plan to the dot. You cannot just blindly add positions to the trade, but you also need to take into account how you would be managing your risks for each of the positions that were added.