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Scaling Out of a Trade

By Richard Krivo, Trading Instructor
20 July 2012 19:08 GMT

Have you ever closed out a trade profitably and then checked back a day or two later only to find that the pair continued to move another hundred or so pips in your direction? I know I have!

First of all, congratulate yourself on having a profitable trade.

Next, you can begin practicing the trade management strategy outlined below: scaling out of a trade.

(Scaling out of a trade means closing out part of a multiple lot trade as levels of profitability are achieved.)

A key point when implementing this strategy is to remember that when you add additional lots to a trade, you are taking on additional risk. Be certain to pay attention to the rules of Money Management so that you are not overleveraging your account.

To begin, let’s take a look at this historical Daily chart of the USDCHF below for a visual…

Scaling_Out_of_a_Trade_body_scaling_7_20.png, Scaling Out of a Trade

Let’s say the trader sold 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 600 pips would be gained on that lot.

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 1050 pips would be gained on that lot.

On the fourth position we would simply continue to trail the stop down as indicated on the chart to capture any additional downside potential.

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20 July 2012 19:08 GMT