What is 'Scale In'

Scale in is the process of purchasing shares as the price decreases. To scale in (or scaling in) means to set a target price and then invest in increments as the stock falls below that price. This buying continues until the price stops falling or the intended trade size is reached. Scaling in will, ideally, lower the average purchase price. If the stock does not come back to the target price, however, the investor ends up purchasing a losing stock.

BREAKING DOWN 'Scale In'

A scale in strategy gives an investor the option of buying additional stock as the price drops. For example, if a stock is worth $20 and an investor wants 1,000 shares, he or she can scale in, rather than purchasing all the shares at once. When the price reaches $20, the investor could buy 250 shares right away, then 250 shares at $19.90, 250 at $19.80 and 250 at $19.70. If the stock price stops falling, the investor would stop scaling in. The average purchase price would then be $19.85, rather than $20.

Profitable traders turn to scaling into a position for a variety of reasons. Some of the more advanced thinking postulates it's a good idea in order to reduce the amount of slippage received when opening a large trade or to hide a large position that you don't want others to know about. The most important and common reason why traders scale into a trade is to amplify their gains on a trade that has already begun to look like a promising move.

When a trade moves in an investor's favor, larger trade sizes of course result in larger profits. However, when an investor can start off their trade with a smaller trade size and only add to a trade when its winning, they are able to start off our trade by risking a little and end our trade with potential for a greater return. Not only does scaling in enhance the profit potential, it also reduces risk by starting with a smaller trade, only adding to the trade after it's profitable.

Scale In vs. Scale Out

Scaling out of the trade is a similar idea to scaling in, but in reverse. Rather than closing out an entire position once a target price is reached, an investor will partially close the trade in increments, allowing the rest of the shares to ride the stock's move further into profitable territory. This strategy captures a profit while leaving the door open for additional gains. It is also common to move your stop loss to break even or beyond when an initial profit target is hit. That way the remaining position you have open is almost "risk-free."

RELATED TERMS
  1. Scale Out

    Scale out is the process of selling portions of total held shares ...
  2. Minimum Efficient Scale

    The minimum efficient scale is the least amount of production ...
  3. Linear Price Scale

    A linear price scale is a type of scale used on a chart that ...
  4. Home Market Effect

    The home market effect hypothesizes that large countries will ...
  5. Profit Target

    A profit target is a predetermined point at which an investor ...
  6. Stop Order

    A stop order is an order to buy or sell a security when its price ...
Related Articles
  1. Managing Wealth

    Is Pressing The Trade Just Pressing Your Luck?

    Scaling up into a trade can be a lucrative strategy, but you need to understand the risks involved.
  2. Investing

    Optimal Position Size Reduces Risk

    Finding the right position size can minimize loss for a trader.
  3. Trading

    Pyramid Your Way To Profits

    This strategy involves scaling into profitable investments as they continue to rise.
  4. Trading

    Maximize Profits With Volatility Stops

    Find out which type of volatility stop fits your trading objectives.
  5. Trading

    Manage Risk With Trailing Stops And Protective Put Options

    Using the right strategy can lower the risk of failure and protect your profits.
  6. Trading

    Increase Your Profits With Soft or Mental Stops

    A soft stop provides traders with added flexibility, allowing them to react to the market.
  7. Investing

    Day Trading Strategies for Beginners

    This day trading tutorial covers general principles, deciding when to buy and sell, common day trading strategies and how to limit losses.
RELATED FAQS
  1. What are the differences between internal and external economies of scale?

    Take a deeper look at the differences between internal and external economies of scale, and learn why internal economies ... Read Answer >>
  2. What is the difference between a logarithmic price scale and a linear one?

    The interpretation of a stock chart can vary among different traders depending on the type of price scale used when viewing ... Read Answer >>
  3. What is the difference between a stop order and a stop limit order?

    Learn the differences between a stop order and a stop limit order. Traders use these as stop losses and regular investors ... Read Answer >>
  4. What is the difference between a buy limit and a stop order?

    Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the ... Read Answer >>
Trading Center