What Is a Scale In?
Scaling in is a trading strategy that involves buying shares as the price decreases. To scale in (or scaling in) means to set a target price and then invest in volumes 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, as the trader is paying less each time the price drops. If the stock does not come back to the target price, however, the investor ends up purchasing a losing stock.
- Scaling refers to the trading strategy of buying multiple orders at different prices so as to limit the impact of putting in one big order.
- With scaling in, an investor sets a target price, then buys at different intervals as the price drops; the investor stops buying once the price reverses course, or once the trade size has been reached.
- With scaling out, an investor partially closes out a trade a little at a time as the price rises, taking some profits, while also letting some of the shares benefit from the higher price.
- With scaling in, a trader can hide big moves by making them piece by piece, and can also benefit from a trade that starts to go in their favor by slowly increasing their position.
Understanding a Scale In
A scale in strategy gives an investor the option of buying additional stock as the price drops. An investor using this strategy assumes that the decline in price is temporary and the stock will ultimately rebound, making the lower price a relative bargain.
For example, if a stock is worth $20 and an investor wants 1,000 shares, they 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.
Investors need to consider the fees and other charges associated with multiple trades versus one larger trade when considering scaling as a strategy.
Advantages of Scaling In
Profitable traders use scaling in to 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 in to 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 result in larger profits. However, when an investor can start off their trade with smaller trade sizes and only add to a trade when it's winning, they are able to start off the trade by risking a little and end the trade with potential for a greater return. Not only does scaling in enhance the profit potential, but 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 a 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."