Scaling with Position Reduction (Partial Position Closure)

As previously mentioned, reducing your position size is an effective risk management strategy that helps reduce your exposure to risk in both winning and losing trades.

Using trailing stops also helps lock in profits while minimizing risk. Let's take a look at an example to see how it works in practice.

Scaling with Position Reduction (Partial Position Close)

Example:

Suppose you have a trading account with a balance of $10,000. You open a short position of 10,000 units of the EUR/USD pair at 1.3000 and set a stop-loss at 1.3100, aiming to make 300 pips.

With a 10,000 unit EUR/USD position, where each pip is worth $1, and a 100-pip stop-loss, your total risk is $100, or 1% of your account.

A few days later, EUR/USD drops to 1.2900, giving you 100 pips of profit. This means you’ve made $100, or 1% profit.

However, when the Federal Reserve releases a statement that could weaken the dollar, you think, “This could bring dollar sellers back into the market, and I believe EUR/USD will continue to fall… I’ll take some profits now.”

You decide to close half of your position by buying 5,000 units of EUR/USD at the current price of 1.2900. This locks in a profit of $50 on your account (with 5,000 units of EUR/USD, the pip value is $0.50 — you’ve closed a 100-pip profit, equaling $50).

Now you have 5,000 units of EUR/USD left at 1.3000. You can set your stop to break even (1.3000) and continue trading without any risk.

If the price goes back up and hits your stop at 1.3000, you’ll close the trade with no loss. If the price continues to drop, you’ll be able to make even more profit.

Now, if EUR/USD continues to drop to 1.2700, you’ll make $300.

But if you had kept your full original position without scaling out, your total profit would be $300. However, by closing half of your position at 100 pips profit ($50) and the remaining 5,000 units at 300 pips profit ($150), your total profit is $200 instead of the maximum $300.

So, what should you choose?

Think about what’s more important to you: making 50% more profit or having the peace of mind knowing that part of your profit is already locked in, and you can continue trading without risk?

Although there is a chance the market could go further and bring you more profit, it’s important to weigh the decision carefully.

With experience, you’ll find the optimal approach that works best for you, combining effective use of scaling while minimizing risk.

Scaling with Position Increase (Adding to Profits)

When traders start adding to their position in profitable trades, the question may arise: "Why do this?" The answer is simple: if done correctly, increasing your position can significantly boost your profit.

However, keep in mind that, like with any potential increase in profits, it also increases your risk. The greater the potential profit, the greater the risk. Mistakes can be costly, and if you're not careful, your capital can decrease much faster than you expect.

The key difference between the "right" and "wrong" ways of increasing a position lies in how you manage the profit and set your stop-losses. Be very cautious if you decide to scale into your position and always carefully calculate the risks.

 

In the following sections, we’ll discuss different scenarios for using scaling before we dive into position size increase. But first, let's go over all possible risks and how to minimize them.