Scaling into positions is something that many traders do the opposite of, to their detriment. Certainly, it is a known trading technique, but how many apply it when they are spread betting their favourite financial instrument?
Scaling into positions entails buying more of a winning trade you have already entered. Perhaps that is why traders are averse to doing it – after all, you must pay more for the new spread bets than you did for the original ones in the same security, and that goes against the grain. But the way that many novices trade is bound to cause some problems in the long run – what they do is scale into a position if it falls in value.
Why would you buy more of a trade that has lost value? The thinking is that if it was worth buying at the previous price, it must be even more worth buying if the price has gone down. But this is muddled thinking, as the reason for buying in the first place was in the expectation that the price would go up, which it plainly has failed to do so far. That’s not to say that it won’t perhaps turn around, but the odds are getting slimmer.
So while it may feel strange, scaling into a position requires you to buy more when the price has gone up, because then your trade has started to look like a good one. If you are wondering why you wouldn’t just put all your eventual bet into the trade at the start, then you only need to think about your money management, asset allocation and the amount that you risk losing.
It is common practice to limit the amount you can lose in any particular trade by considering where your initial stop loss should be, and calculating the position size from this to limit your total possible loss. When the trade has moved in the right direction, you can move the stop loss to protect your gains, and therefore you no longer have the same potential loss. This means that you can afford to place a further trade on the same spread bet, as if the bet turns against you, your losses are still held down to an acceptable level.
You should not scale a trade as a matter of course, if it happens to start in the right direction. You still need to check the indicators, and make sure that the reasons you entered the trade in the first place are still valid.
So scaling into a position allows you to profit more from a good trade than you could if you just entered an initial trade set by the maximum loss you work to. It is a high percentage strategy, because the trade has already proved itself likely to work by starting to move in the right direction. Making more money with less risk is one of the principal ideas that you want to pursue as a trader.