Scaling out of a position - just an exit strategy?

I haven’t read anything about scaling out of a position in the Forex Discussion thread and thought this might stimulate a good discussion.

For those who do not know what scaling out of a position is, it is when you close a portion of your trade once it reaches one point and close another portion at another point ( and so on ). There are a myriad of variations to this theme, for example moving stop loss orders to Breakeven after closing the first portion, adding trailing stops along the way, closing different fractions of your position …

If this method works for you and helps you maintain consistency, great. As most traders will tell you, ‘Whatever works for you’. Most traders that use this method of scaling out of a position declare it as part of there money management system or exit strategy, and it can be. But it should also be considered as a solution (or maybe a work around) to psychological challenges one faces while trading. Fear over not wanting to give anything back, being unsure of your position and not wanting to ‘lose’ seem to be the most obvious of the psychological barriers.

As you become more experienced and confident in your trading, examine the psychological reasons for your scaling out methodology. Be as honest as possible. If you can overcome these psychological hurdles, you will have reached a major milestone in trading. Your trading should improve. I know several traders that are happy using their scale out methodologies and make consistent profits as traders. They will probably not examine their own psychological barriers (if any). Hey, ‘if it is not broken why fix it’. They are meeting their own definition of success and that is all that really counts.

I am not trying to say that scaling out is not a valid methodology. Exit strategies are some of the hardest and most controversial strategies around. My philosophy is ,when you enter a trade you should have a clear exit strategy. Once you have mastered your emotions while in a trade (another very big milestone) you can modify your exit strategy to include re-analysis of the market and your current exit strategy while still in the trade (since the market is constantly evolving, why should your entry and exit be static). But that is for advanced traders only. Until you have become consistent in your trading and analysis, always have clear entry and exit strategy that does not change while in the trade.

Sorry about that, drifted off my own topic.


Ok, let’s hear from you …

PS - do not dismiss the "pycological stuff" it really is important.

You can get a lot of information on the Psychological challenges of trading from reading the thread “Information for Beginners” in the Forex Beginner Q&A forum. Also the James16 group has incredible resources on this topic (plus much much more!!!)

I think scaling out is an important exit strategy sometimes. It's just another tool in the exit strategy portfolio. I primarily use trailing stops, moving it up to areas of importance as they are passed.

However, if I'm in a trade and things don't "feel" right, I may scale back my position, but I see this as more of risk management then true exit strategy (Same thing?). Usually I will just tighten stops, but if the signs are strong enough I may do both tighten stops and scale back, or just scale back for that matter - depending on situation.

Perhaps it's because i'm a discretionary trader that this works for me. I can understand with a mechanical system how it could lower profits if used as a primary means.

For this reason http://www.forexfactory.com/showthread.php?t=12273
The odd time I do it I leave no more than 1 lot in the trade with a tight TS.
But it really is the exceptional trade that isn't - all in, all out

Thanks for the link to that thread Peter.. excellent stuff. I think i'll be scaling out far less now