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."