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How To Scale Out of a Trade

How To Scale Out of a Trade

2011-07-06 21:38:00
Richard Krivo, Trading Instructor

During a recent LIVE webinar session, a question came in about how to “scale” out of a position after having entered the trade with multiple lots. (Scaling out of a position is closing out part of a multiple lot trade as certain levels of profitability are achieved.)

Take a look at the chart below for a visual…

How_To_Scale_Out_of_a_Trade_body_Chart_7_6_11.png, How To Scale Out of a Trade

Let’s say the trader shorted 4 lots of the USDCHF based on a break of support in this downtrend on the Daily chart above.

After the price action has created a new low (second black line from the left) we would take off one of the four positions when price takes out that low at the second black arrow. When that position is closed about 250 pips would be locked in.

After price action has created another low (third black line from the left) we would take off the second of the four positions when price takes out that low at the third black arrow. When that position is closed approximately 365 pips would be gained.

After price action has created the next low (fourth black line from the left) we would take off the third of the four positions when price takes out that low at the fourth black arrow. When that position is closed approximately 360 pips would be gained.

On the fourth position we would simply trail the stop down to capture any additional downside potential that may continue.

(To learn how to manually trail a stop, click HERE to view a recent article on that topic.)

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.