Today, what we’re going to do is take a look at three different ways to scale into stocks. There are many more ways than just these three ways, but I want to show you three different ways to think about scaling into stocks or scaling out of stocks.
What scaling do?
The whole point behind this is to reduce your risk because you don’t know if that stock is going to continue heading higher or continue heading lower. So, you break these things apart from your entry positions that way you hopefully have a better average.
The disadvantage is while if the stock continues heading higher into higher prices and it works in your favor, it would have been better to buy all your shares at the beginning because then you could get out sooner with a much larger profit.
But of course, in the other approaches, if the stock headed lower, it’s good you didn’t buy that many shares.
Linear Approach
The linear approach is stacking things on a linear level.
Let’s say stock increases. I’m going to go ahead and do this 500, 500, and 500.
What you could think about, as you start looking at things in this way, is you could almost break these apart in different trades. This first trade, you don’t have to think about saying this is where my out position is. Instead, you could think of your early exit, your second exit, and your third exit.
So, you tie these together to your exits. You’re staggering your exit positions as well. So, you could break it apart from that way as you start thinking about scaling.
One of the advantages to this is you have a linear amount at every single entry point, and everything’s balanced. It’s a right approach in one way because everything is working out okay to the upside and it’s working out the same way to the downside.
Increasing Approach
This is the approach where you’re testing the stock. When you’re doing the increase method, you’re checking to see that’s not going to go higher. If it does well, you’ll go ahead and add a little more. That’s where you add in 500, and then you could go ahead and add in 800 if it continues and the stock proves to you that it’s working out.
The advantage to this is you’re looking at stock to prove itself to you.
The problem with this is all give-and-take. Not one is better than the other. It’s just a give and takes.
The problem with this one with an increasing method is that you’re already at way higher prices and you have a much more significant share amount at higher prices.
The advantage, of course, if you didn’t have a lot of risk at the beginning. You didn’t have to put up a lot of capital because if that thing started to go down, your loss would have been much smaller.
Decreasing Approach
I could go huge at the beginning. Let’s say 800 shares. Then I might go 500 shares next, and then a little bit less 200 at the end.
This is another different approach. You’re decreasing your share amount, and this is good when you’re relatively strong about the stock. You have a reasonably stable break out, but you don’t want to put all your capital in at once.
The advantage of this, of course, is that I’m getting in on a stable position at the beginning. I can peel off and take shares off much sooner and so I have an excellent position at a lower level.
The disadvantage, of course, is if this thing started actually to roll over, it would create much more significant losses than it would if you did the 200 shares at the beginning.
If you’re brand new to scaling and you’re just trying things out, then I would say a good starting point makes this balanced approach.
This is more of a balance where you’re even, that’s our linear way. Where you’re going in 500 shares, 500 shares, 500 shares, and staggering things, it allows you to peel off those things as you move up in strengths or downward.
Final Word
The increase approach is excellent if you’re testing a stock and the decreasing plan is when you feel right about the stock, and it’s got a pretty strong breakout, but then you want to slowly get into it still through this different way of scaling.
If you’re wondering how many times should you scale, the number of times I’d say for most people three to four times.
Once you start going into ten or twenty times, it starts to become irrelevant or not necessary or just more work than it’s worth.
