How to Scale Out to Lock Profits in Volatile Markets

Unstable markets may feel, one moment, to be a thrilling roller-coaster ride, and then the next moment you are vely heart rates of the markets. The price goes up, and down, then up again, and you face the decision of if you are going to stay into this trade or bail. Enter "scaling out" of the trade. Rather than choosing "all in or all out", you have the possibility of locking in some profits, while still having skin in the game.

Scaling out is one of the easiest and most useful tools in your toolkit to address uncertainty. Scaling out allows you to have the peace and security of banking a profit without giving away the hope of future profit.

What is scaling out?

Scaling out is closing out part of your position and not closing out your entire position. To clarify, if you are long one lot EUR/USD, you close out The half of the position at your price target, and the other half of the trade stays open.

Scaling out will work especially well in volatile markets, where a small price swing erodes your paper profits very fast. If you close part of your trade out and take a profit, you are protecting your account and still allowing time on the trade, or ride some bigger moves.

Why it works with volatility

Volatility is what makes really two-way markets unbelievably unpredictable. As soon as you are sitting on profits, you may find a second later, there are no profits due to a sudden loss with a market reversion. Scaling out is a way to help you address uncertainty while providing a mixture of security and opportunity.

It is somewhat like the experience of hiking up a steep mountain: at various points of the hike, people will stop and take a rest, to catch their breath and admire the views, rather than just hiking nonstop up to the top of the mountain. Everyone knows that even if you do not make it to the summit, you are still gaining all the way up.

A realistic example

You're trading GBP/USD, for example, during a week of high-impact news. The pair rallies towards you and you are now up 100 pips. However, you are also aware that the potential for volatility is near and you still want to keep a piece of this trade. Instead of pulling the plug and taking all of your profits, you scale out by taking profits on half of your position.

Now you have profits in your bank. You manage the remaining half of your position by moving your stop-loss to breakeven. You can now let the trade run; if the market continues to move in your favor, your profits increase. Conversely, if the market reverses, you send off all of your position without sustaining a loss.

Scaling out methods

There are many ways to structure scaling out of your position; here are two methods.

Target based trending: Part of your trade should come off at different price levels; take half of your profits at 50 pips and the other half at 100 pips.

Trailing scaling: Take partial profits, and then trail your stop on your remaining position as the market momentum shifts.

The two methods have the same purpose: both methods are equally possible to realize a portion of the trade while while maintaining exposure to the upside.

Scaling out—step by step

It should be noted that even though scaling out is effective, it is not perfect. Often traders fall into the trap of:

Scaling out too soon: taking profits too soon can limit the potential in your position.

No game plan: getting out of a position without delay can often result in randomization or lack of a trade plan.

Your way of thinking should be backed with concrete discipline. You will be glad to have made a predetermined decision to cut a proportion or predetermined commitment at a set amount rather than afford yourself the opportunity to make an emotionally based decision once the trade is underway.

Final Thoughts

Many traders are intimidated by volatile markets. However, if a trader learns to scale out of a position in increments, volatility becomes somewhat of an advantage. Anytime a trader scales out, they lock in profits, lessen stress, and allow themselves the opportunity to potentially benefit from more significant market movers.

Volatility can promote caution and opportunity in how you protect your capital while still leaving the option of something larger open to the future.

If you are interested in learning more about scaling out and other practical strategies, please visit the Learn section of Wikilix where traders take simple concepts and turn them into good practice habits for long term success.