Nothing feels better than executing a trade, following the game plan, and watching it work.
But have you ever gotten out of a winning trade…
Only to continue move higher and higher?
You’re left wondering…
Is there any why I could have made some more money on the trade…
Without playing the role of “captain hindsight?”
Actually there is, and I’m going to show you how!
It’s a trading concept called SCALING…
And I’m going to teach you all about it today.
In fact, its how I was able to score some nice profits on ZS on the back of its earnings the other day.
Let’s get started on the basics of scaling, and how you can start implementing it in your trading.
I’ve written about scaling before a few times. However, I want to take a slightly different approach to it today.
Most people focus on scaling into a trade, which is certainly a good call. However, there’s a lot to be said about scaling out of a trade.
Let’s start with when it’s a good idea to scale out of a trade.
You need to have the following conditions present in order to even consider scaling out of a trade as a strategy.
- Large enough Average True Range (ATR)
- Sufficient buying power relative to total account size
- At least one defined target
Note: Average True Range basically tells you what the max range is over whatever period you’re looking at. It gives you a sense of how much things can move.
So, why all these rules?
To start with, if you’re trying to scalp ticks or a few pennies here and there, you won’t have enough cushion to scale out.
Imagine trying to ride a $30 stock $0.05 and then scale out of the trade. You’d be lucky if the stock didn’t move immediately against you almost every time.
Scaling really only works if you have a sufficient range to work with. Otherwise, keep it to one target and focus on maximize your win-rate and risk/reward ratio.
Second, scaling only works if you have enough shares or contracts to scale. A lot of people that trade futures contracts only buy one contract at a time. It’s impossible to scale out unless you have at least two.
At the same time, you don’t want to force yourself into a situation where you risk too much money simply to set yourself up so that you can scale. That defeats the whole purpose.
Lastly, scaling only works if you have at least one target. If that’s not part of your plan from the outset, then you need to rethink your strategy from scratch.
Techniques to maximize profits
Now, here’s a few ways to work on maximizing scaling that you can try with your own trading.
- Trailing stops – Once you hit your target, you set a trailing stop that at least takes off the remaining shares at breakeven. You can always widen or shrink the trailing stop as it moves along. But never put it below your initial entry.
- Moving stops – Like a trailing stop, you put in a stop-loss order and move it up in increments based on price milestones. For example, I enter a trade at $20 and take a profit at $20.25. I start with a stop-loss order at $20. Every time price moves up $0.25, I move up my stop order by $0.25. So when price is at $20.49, my stop is still at $20. Once it moves to $20.50, I move my stop to $20.25.
- Closing candles – A great way to avoid getting whipped out of a trade is to use the close of a candle. Initially, I set my stop loss back to break even. Then, I close out the remaining portion whenever I get my first hourly candle that closes below the low of the previous candle (or some other methodology).
There’s thousands of ways you can tailor these to your particular brand of trading. No one is better than the other.
You want to find the one that best suits YOUR style.
Learn how to do it from a seasoned trader
Profitable trading doesn’t have to be this wandering journey that takes years. You can cut the learning curve by working with an experienced trader that can show you how to be profitable.
That’s why I created LottoX – a way for traders to experience fun trading at a fast pace. These trades last anywhere from a few hours to a few days, streamed live from my account.
You don’t want to miss this.