Scaling out is a trading technique that sells rising stock as the price increases. This raises the amount that is netted with the sale of a certain number of shares if the stock continues rising in value. It is like scaling in, but scaling in buys lower and lower instead of selling at higher and higher values. Following is some investing advice and information on scaling out in stock trading.
Scaling Out, a Stock Trading Technique
Scaling out is a process that enacts a series of sell exchanges as a stock increases in value. Whereas a standard limit order may miss out on the returns that a rising stock could secure, scaling out is a practice that earns more with each sell. This technique can work as long as the price keeps increasing, and until the desired amount of shares are sold.
Scaling Out Investing Example
Suppose that a trader is holding onto shares of a stock that is presently trading at $30 per share. If she wants to unload 90 shares once (if) the price begins to steadily rise, she could scale out. She could sell 30 shares at $31, then 30 additional shares at $32, and the final 30 of 90 shares at $33. This means that the average payment received per share is $32.
How Scaling Out Works
Scaling out can work as a stock rises until all shares have been unloaded. However, it may not work at all. For successful scaling out, price of the stock must continue rising by the set increments, at which points sell orders are carried through.
Investors at discount trade sites like E-Trade, and TD Ameritrade can practice this technique. Referring to the above scenario (with the rising stock trading at $30), an investor could set a sell limit to unload 30 shares at $31, another sell limit exchange to unload another 30 shares at $32, and a final limit sell for the last 30 of the 90 share trade size at $33. If the stock keeps rising, the orders will fill. Generally, the investor will want to final trade to align with a point just below that at which she thinks that the stock will turn around and head down.
Although there is no guarantee that all of the shares will be traded in attempting this stock trading tactic, because the price could stop rising and only some of the shares may be unloaded before it turns around, scaling out can be much more profitable than a standard limit order can be. A limit order for all 90 shares at $31 (in the above scenario) would net about $90 less than a successful scale out, because it will buy as soon as the price hits $31 or over, and the scale out will buy at $31 or over, $32 or over, and finally, at $33 or over.
This tactic simply capitalizes on rising stock, selling to earn more as value increases. It can be very profitable when done correctly under the right conditions.