We will clarify a few definitions before discussing the Scaling Out strategy. What I am referring to is using the R:R ratio (Risk Reward Ratio) – 1:2 or 1:3 to trade Forex. This means, in a 1:2 ratio, if your stop loss is 80 pips, then your take profit is 160 pips. Simply put, when you lose, you lose less, and when you win, you win a lot.
Why should anyone use the Scaling Out strategy?
The first reason is that it appears almost everywhere like the internet, forums, classic and modern methods….
The second reason is that it works with certain methods. Most people often don’t have an inherently advantageous management approach. So if you use the R:R ratio while trading Forex, then at least you have done better than 90% of the people out there.
However, the fixed R:R ratio will take away many of your trading advantages. Let me assume a few scenarios.
- Have you ever placed an order at the rate of R:R and the price almost touched Take Profit just a few pips away then turned around to stick to your Stop Loss?
- Have you ever seen the price touched the Take Profit you set and then moved extremely strongly in the direction you predicted earlier? And you have completely missed out on a winning trade worth a whole month of your profit if the order is still running.
Let’s say you use a 1:1 ratio, which means you have a stop loss of 100 pips and a take profit of 100 pips. We don’t care how the market moves. You will have a 50% chance of the price hitting one of the two before the other.
However, when you make this 1:2. You are asking the price to move 2x more than you asked before. People think you still have a 33% chance of winning. However, it is less than 33%.
Using a fixed R:R ratio makes you miss the Scaling Out strategy
Scaling Out strategy simply understands that when you win and make a profit, you will take part of the profit and let the rest continue to do its job.
Instead of closing 100% of the position with a fixed rate of R:R 1:2 or 1:3, you only close 50% of the position, specifically as follows.
Place your stop loss order at -100 pips
Set your price target at 100 pips, but only close 50% of your position if the price gets there.
Now move your stop loss to breakeven. That is, the original stop loss was -100 pips, now you have a stop loss of 0 pips because you have moved the stop loss to break even point.
Let the rest run
I’m sure many of you will laugh at this because I know what you’re thinking.
Yes, the Scaling Out strategy also has weaknesses.
After you take your initial profit, the price will retrace and move in the other direction. Usually, the price will return to touch the new breakeven stop loss you just made.
In the example above, this will make your 100 pips “win” into 50 pips win. And this happens a lot. But you WANT it to happen a lot because these are its great advantages
Loss prevention using Scaling Out
There is a simple thing that I often say in many articles that few people pay attention to. Stopping a loss is as big as winning a trade. And undisputedly taking a partial profit and moving the stop loss to breakeven gives you a free trade. If you are wrong, you are still profitable. But if true, the reward could be a huge win you never expected.
By scaling and capturing these smaller wins, you can not only eliminate a lot of losses but also turn them into wins.
If you do it right, it will minimize your current account loss.
Look at the other side. If you can make these smaller wins eliminate your previous losses, then you are establishing yourself a trading consistency.
If you can continuously accumulate these small wins, they will create not small numbers. Especially doing that is also easier for yourself than the big wins. Doesn’t this excite you? Usually, everyone wants to win a lot but doesn’t realize that even breaking even is also a win.
Not every trade will return to your breakeven point. Sometimes a small percentage of orders are left running. And that order can run as far as 500-1500 pips or a price you don’t expect. This is really the way we should use to make money when trading.
You need to take a disciplined and calculated approach to ensure that small wins make up for losses that shouldn’t be. Then, when it’s time for big orders, you also have to make sure that you are still implementing the correct Scaling Out strategy. I guarantee that you should participate as much as possible as this is your steady profit. Profit mainly comes from the trades that I have described above. But if you use a fixed ratio of 1:2, there won’t be any big wins
Take a part of the profit and move the Stop Loss to breakeven to protect the account. Patiently receive many breakeven orders to wait for some time to get a big win. I do not write this article to stigmatize or disparage the method of using a fixed R:R ratio. But choose for yourself the way that is right for you.
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