How ‘scaling out’ of trades can cure profit taking anxieties
I’ve got an alternative way of exiting trades I’d like to tell you about…
It might be a concept you’re already familiar with. And if that’s the case you’ll already know how powerful the technique can be.
But please don’t feel overwhelmed if you haven’t come across it before. Or worse, think it is only for ‘advanced traders’.
Yes, it does need a bit more consideration than simply attaching a single target price to your entry order, but once you realise how much flexibility it can add to your trading (and by flexibility I mean additional profits!) I’m sure you’ll agree it’s worth taking an extra step or two when the circumstances are right.
So what is this mysterious method I’m referring to?
I’m taking about scaling out of your profitable trades piece by piece.
Why ‘scaled exits’ are often overlooked by Forex traders
Now let me be clear, scaled exits are nothing new. It’s not some cutting edge technique I’ve just invented!
You’ll read about the old masters of trading scaling out of their trades – they were doing it a hundred years ago or more.
And scaling has always been a permanent fixture of the futures trading scene. Many futures order platforms actually have the facility to place scaled exit orders built right into them.
But scaling isn’t often discussed when it comes to Forex trading.
I’m not saying there aren’t Forex traders out there scaling into and out of positions; it’s just that many Forex traders will have their first taste of trading using order platforms that don’t exactly promote the use of scaled exit orders.
When you use platforms like Metatrader, or the broker’s proprietary online platforms, they tend to present you the opportunity to attach a single-price stop-loss order and a single-price ‘take profit’ order for each trade entry you place.
Now there’s nothing wrong with this in principle. After all, we know how critical it is to cover your open positions with protective stop-loss orders. And if you didn’t already have a good idea of your initial target for the trade, how would you have known this was a good opportunity in the first place, so it’s probably fair to say you’d already have a good idea of your intended target price, right?
So why all the fuss about scaled exits?
Well the beauty of scaling-out is how handy a tool it is to have in your arsenal when you’re not quite sure exactly which exit point to use…
Hmm, that level of resistance at 1.2000 looks solid, but I don’t want to push my luck – what if the trade reverses earlier, around 1.1180? I don’t want to leave all that profit on the table.
If you’ve ever had this kind of conversation with yourself you’ll know exactly what I’m talking about!
It’s so easy to tie yourself in knots justifying the best exit point for the trade. But let’s face it; no one knows for sure what’s going to happen next in the market, so why not use both exit points?
Why not scale out of the trade at 1.1180 and at 1.2000? That way you won’t be kicking yourself in the shins for making the wrong choice!
All you’d do is exit half your position at 1.1180 and half at 1.2000. Sound obvious, right?
And it is, except many traders miss the extra edge this can give them simply because Forex technology – the Forex trading platforms – tends to railroad them into attaching one single stop loss and one single take profit order to each entry they place. It can almost blinker them to other possibilities.
How to place orders that let you scale out of trades
So let’s have a look at ways you can still scale out of trades even though you might not see it labelled as an obvious option on the broker’s order ticket.
First of all, you’d place your entry order as normal. After all, until you’re riding a position you won’t have any exits to make!
1) Place your entry order: Get your trade set up with an entry at the market, or by using one of the pending order types (the stop order or the limit order). Just go with whatever your normal method of entering trades is.
2) Prepare your stop loss order: This is where the all-important stop loss comes into play. You can place your associated stop loss order in the normal way but you will need to carry out some in-flight adjustments to your stop loss as the trade develops. More about that in a moment so just hold that thought for now.
3) Place your exit orders: Here’s where you do something a bit different to normal. Instead of placing just one ‘take profit’ exit order matching the size of your entry (i.e. if you entered a trade at £1 per pip, you’d have one take profit target at £1 per pip), you’d place orders at 2,3, or even more different places that you’d identified as good potential targets.
So from our example above, you might enter your trade with a position size of £1 per pip and you may have been torn between 1.1180 and 1.2000 as your profit targets…
Well, now you’d enter your trade as normal, and you’d place your stop loss of £1 per pip as normal, but you’d place one SELL LIMIT order for 50p per pip at 1.1180 – that would scale you out of the first half of the trade – and you’d place another SELL LIMIT order for 50p per pip at 1.2000 to take profits on the second half of the trade.
4) Trade management: Let’s say the first profit target is filled for 50p per pip at 1.1180. How does this leave you standing? Well, you’ve already banked hard profits on part of the trade and you still have a 50p position working in the market. But you also have your full sized stop loss of £1 per pip still active! So you’d now cancel and amend that stop loss order to match the size of your position as it changes. Cancel the £1 stop loss and re-enter it to cover 50p per pip. You might trail this new stop loss up higher behind the price action too.
5) Ideas for development: so that’s the scaled-exit principle in its most basic form. We’ve changed a single profit target to a dual profit target. But the scope for scaling out of (and into) trades can be as simple or complex as you like…
Instead of entering a single £1 per pip entry order how about entering 10 separate orders for 10p per pip each?
That would give you individual control of attached stop loss and take profit orders in advance right from the initial order entry tickets. It’s not always convenient to do in fast moving markets, especially when you’re concentrating on getting the best fill price, but it can give you many flexible options for managing the overall position.
Or how about entering five separate orders for 20p per pip?
You’d have exit points pre-identified for all five entries but say the market breaks out on strong volatility? Instead of capping your potential profits you could close just 60p per pip of your position at the original targets, cancel targets for the other two 20p trades and let that 40p part of the position run on for all its worth. You’d cancel your hard take profit orders and simply trail your stop loss up behind the market.
So if you’ve not considered scaling out of trades before give it a try. It really is one of those rare occasions where you can have your cake, and eat it too!
Be Prepared: Market Moving Data Coming This Week (London Time)
Wednesday 5th August:
09:30 GBP Services PMI
13:15 USD Non-farm employment change
15:00 USD ISM non-manufacturing PMI
Thursday 6th August:
09:30 GBP Manufacturing production
12:00 GBP BoE Inflation Report
12:00 GBP Interest Rate Decision
12:00 GBP BoE Meeting minutes & Carney speaks
Friday 7th August:
07:30 JPY Bank of Japan press conference
13:30 USD US Job numbers
Monday 10th August:
- no big reports
Tuesday 11th August:
10:00 EUR German ZEW economic sentiment
Some big data releases are due out this week…
Wednesday for a glut of stuff from the Bank of England, so keep a close eye on any open positions in Cable (GBPUSD). And then it’s US job numbers on Friday. That report always has the potential to make things jump so do keep on your toes if you are in the market around lunchtime!
Until next time, happy trading!
P.S. Nip over to the TN Facebook page here and leave me a quick comment – let me know what you think about ‘scaling out’ of trades.
