Scaling Out of a Pullback Trade

Scaling out of a position can feel like leaving money on the table at first but it's a way of mitigating risk. The number one rule of trading is to protect your capital. By scaling out of your position percentage increments you reduce the level of risk in the trade.


A stock has moved through a level of resistance at $9.92 and and pull back in to test that level. That level holds and you decide to get long at $10.00 with 100 shares and set your stop loss at $9.80 with the idea that price will move to $11.00.

Stop is $9.80, meaning risk is 20 cents in the trade ($20.00 of your capital)
Price Target is $11.00, $1.00 from entry and five times the risk amount from your entry (a "good" entry for a trade is when the price target is more than two times risk)

1st Profit Target: when 1:1 reward/risk is reached, in front of the previous high ($10.20)
  • closing 25% of your position when you've reached 1:1 risk reward means you've profited $5.00 in the position and cut your risk in half without moving your stop
    • 25 shares sold at $10.20; $5.00 profited
    • 75 shares remain from $10.00, risk is till 20 cents below there at $9.80
      • 20 cents x 75 = $15.00
      • $15.00 - $5.00 profit from selling 25 shares at 1:1 ration = $10.00 risk
2nd Profit Target: when the previous high of day breaks and the price extends to 2:1 reward/risk from your entry ($10.40)
  • closing 50% of your original position when 2:1 reward/risk is met means you've profited $25.00 and reduced your risk even further
    • 25 shares sold at $10.20; $5.00 profited
    • 50 shares sold at $10.40; $20.00 profited
At this point in the trade you can do a couple different things: 
  • leave you stop where it is
    • with 25 shares left in the trade your risk is now $5.00 from your entry at $10.00
      • 20 cents x 25 shares left trading
  • move your stop up to your entry
    • this reduces your risk to nothing but gives the stock less room to work
    • if price moves back to your entry you stop out and would profit $25.00 in the trade
      • 25 shares sold at $10.20; $5.00 profit
      • 50 shares sold at $10.40; $20.00 profit
      • 25 shares sold at $10.00; $0.00 profit
  • move your stop to your first take profit price. Again, risk is reduced entirely but the stock has even less room to work, however, minimum profit here is $30.00
      • 25 shares sold at $10.20; $5.00 profit
      • 50 shares sold at $10.40; $20.00 profit
      • 25 shares sold at $10.20; $5.00 profit
3rd Profit Target: when your initial price target it reached or the charts show a clear change in direction. If your profit target is reached at $11.00, you'll profit $50.00 in the trade.
      • 25 shares sold at $10.20; $5.00 profit
      • 50 shares sold at $10.40; $20.00 profit
      • 25 shares sold at $11.00; $25.00 profit