Beginner’s guide to zooming in and out of trading positions

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Prorated Buying and selling of a trading position means gradually building and selling your position as certain milestones are reached.

Trading to scale means you start building a partial position, say 25 shares out of a target of 100 shares.

If the market moves in your direction or shows favorable price action, you have added another “layer” to the trade and now you own half of the total position. Maybe the stock goes up a little bit more and you decide to buy another 50 shares. At this point, you have built a three-buy position instead of a one-buy position.

The same is true for scaling out. You may sell a position aggressively, take some profits off the table immediately, and place a trailing stop for the rest.

So instead of buying or selling your entire position at once, break it up into smaller pieces.

Of course, this is just one way of doing things and has its disadvantages and advantages, which we will discuss in this article.

Why do traders add or subtract positions?
If you want to succeed at this game, you must accept one of the most basic trading principles: the market is not a chess game that can be perfectly solved.

There is a high degree of randomness, which makes it easy to find patterns in the noise.

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In other words, there is no 100% optimal price. You just don’t know. The best trading algorithms developed by the smartest quants in the world don’t even know this.

Because of this, the exact price at which you enter a trade is somewhat arbitrary, even though your trading idea itself may be perfectly valid.

By imposing arbitrary entry and exit restrictions on our trades, we risk missing out on some great opportunities due to inflexible trading rules.

For this reason, some traders choose to enter their positions through several tranche positions to get the “average price” set for the trade and give themselves an exit if their initial entry is bad.

So if you know that none of the trades you make are perfect, it makes sense to validate your trades before you fully buy. By entering a partial position and waiting for the market to confirm your trading idea, you will get a continuation.

If the trade goes bad immediately, you’ll only be taking losses on part of your position.

As a demonstration, let’s look at the Nvidia chart below.

 

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