Should scale trading be part of your investment strategy? What exactly is this trading strategy? We’ll take a look so you can determine if you want to employ this style of trading.
What is Scale Trading?
There are two basic types of scale trading.
Scaling in is a trading strategy where you buy a security in small portions over time as it falls in price. This helps you mitigate risk since you are not buying all at once. Spreading your buying out is akin to dollar-cost averaging. To successfully scale in you set a target price for a security and buy-in set amounts as the price falls. You stop buying once the target price is reached or once the stock reverses course.
Scaling out is a trading strategy where you sell portions of a position over time as the price rises. This strategy allows you to reap profits a little at a time and helps mitigate the risk of selling too early. This strategy reduces your overall profits, but it does help you preserve the profits that you already have.
An Argument in Favor of Scale Trading
Scale Trading, whether in or out, can help your trader minimize exposure and risk to any particular position. Instead of buying or selling all at once you can reap profit or buy in incrementally. Typically, this trading strategy is employed after a trade already looks promising and shows momentum in a given direction.
An Argument Against Scale Trading
Scale trading is just that. Trading. This is not investing, and it shouldn’t be confused with a long-term investing strategy. There is a lot of sophisticated analysis that must be employed to identify market trends and movements of individual stocks. If you aren’t certain that scaling in or out of a trade is a sure bet (at least as sure as possible), then you are simply guessing. Guessing usually doesn’t result in making money. It also locks an investor into buying or selling on a schedule that may not make sense, or profits. Commissions and fees from multiple trades can also kill and profit that you would have realized.
Wrapping Up
Scale trading is a simple trading strategy of buying or selling in increments over time. If you have some money set aside for trading, then you may want to try this strategy. Be warned of the downsides, however. There is a strong argument that there is no real benefit to scale trading long-term because it is nearly impossible to identify a trend of a stock that is reliable. Shorter-term trading strategies are often more profitable, since they are more nimble, and they don’t lock up your capital into any particular position for longer than you want or need it to be. Have you ever used scale trading? Share your experiences below.
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Based in the Pittsburgh, PA area, Brian holds full-time employment as a Warehouse Manager for an electronics firm. Brian enjoys wealth building, investing, gardening and the great outdoors. Brian holds a B.A. in Environmental Studies from the University of Pittsburgh and an MBA from Robert Morris University.
