Scale out

From Traderpedia

Exiting an open position in partial amounts.

For instance, if a trader was long 10 lots and the price of the instrument was rising, (s)he might sell 4 lots at an initial small profit target, 4 lots at an obvious layer of resistance and let the market take out the position on the last 2, perhaps by using a trailing stop.

Scaling in refers to entering a position in the same way, gradually increasing exposure at several price levels.

  • Pyramiding refers to scaling in as the price moves in the trader's favour, for instance buying 1/4 of the position at 100, 1/4 at 105 and 1/2 at 110.
  • Averaging down refers to scaling in as the price does not go in the trader's favour and should generally be avoided.

Most traders do not strictly equate averaging down with scaling in, but it is generally a matter of degree. Buying 10 lots at 100, 5 lots at 98 and 5 at 96 could be scaling in, but buying 10 at 100, 20 at 95 and 50 at 85 would be averaging down.

Scaling in and out can be important elements of money management.