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Everyone trading should have a system of three key elements; an entry strategy, an exit strategy and a position sizing/risk management strategy. In this article we will look at one of these elements, the Exit Strategy.

Scaling Out is a type of Exit Strategy whereby you plan to exit your position in several planned increments as opposed to closing the entire position at once. Now ideally your Exit Strategy should do three things - minimize losses, maximize profits while limiting the amount of profit you give back.

As an example, say you open a position with 300 shares with an average price of $10 each. Let's also assume that your Exit Strategy is to exit this position either when the price reaches $15 or you hit a 10% trailing stop.

Using the above example again but this time Scaling Out,www.louisvuittonclearaceall.com, you might plan to sell 100 shares when you reach $13, another 100 when you reach $14, then you would sell the last 100 when you made your profit target of $15, or keep the position even longer to let the price run.

This is called Scaling Out. This style is commonly thought to reduce losses and increase profits,louis vuitton, following the idea of banking your profits. However it has an unfortunate characteristic that has nasty effects on your profits - Reverse Position Sizing.

Position Sizing is a key area of any trading system. Your position size determines the amount of exposure to loss you have on any position you hold by limiting the number of shares held when you are the most vulnerable.

If you adopt Scaling Out, you will still take the loss on your entire position, but you have the fewest shares in your position when your point gains are the highest. Instead of banking your profits it simply means that overall you lock in maximal losses, but reduce your profits compared to exiting in one hit.

In fact the reverse concept of Scaling In is a better trading model to follow. This ensures that you put more money into trades that are working and less into those that do not. So let us use the above example, but instead of opening our trade with the full 300, let's assume we open with only 100, with our same 10% trailing stop. Now we can only lose 10% of our smaller position size, so our loss at this point is 1/3 that or our original plan.

As the price moves up and our trailing stop reaches our entry price, in this case $10, we add another 100 to our position, which would be at $11. If it moves a further 10% higher, then we add to our position again. Since we will stop out if the price drops back down, we are essentially trading the initial amount for free. This means our risk is limited to only to the 1/3 amount but we now have the same position size as before on which to build out profits (and these we can lock in too as the price rises.

Since this allows us to reduce the amount at risk, we can concentrate our funds into the trades that are making money, while keeping the amount at risk at the same level. This fulfils the goals of an Exit Criteria far better than Scaling Out.

Scaling Out is very popular among traders, as it intuitively sounds sensible. However this Exit Strategy is actually quite destructive of your profitability.

This concept is very counter-intuitive and it took me a long time to see the issues with it. However if you do use Scaling Out,louis vuitton, do not kick yourself too hard. If you have put an Exit Strategy in place it means you are ahead of the vast majority of your peers, unbelievably less than 20% of traders actually have an Exit Strategy they adhere to!