What is scale-in?
But first, let’s look at what scale-in actually means:
In trading, to scale in means to gradually build up your position size as the market creates more entry opportunities. The scale-in strategy is a part of a well-thought-out trading plan, rather than a reactionary attempt to salvage a losing trade.
For stock investors, the scale-in strategy is buying additional stock as the price drops. An investor using this strategy assumes that the price decline is temporary and the stock will ultimately rebound, making the lower price a relative bargain. It’s one method (of many) of how to make a mean reversion strategy.
So, buying as the stock price drops becomes a planned trade entry strategy. In essence, the scale-in strategy is the process of gradually increasing a stock position until it reaches the number of shares or you have invested the dollar amount you planned to invest.
The scale-in strategy offers more flexibility in market timing and enables you to achieve the most optimal average price for their positions.
However, the process requires enormous discipline to stick to the plan when things seem to be falling apart because most of the time, you would be going against the grain and catching a falling knife — buying when the market is selling or selling when the market is buying.
To be successful with the scale-in strategy, you need to be totally convinced and not bother about the so-called wisdom of the masses, but you must be present enough to regularly assess your strategy based on your parameters and performance indices.
There are different ways of implementing the scale-in strategy. One common one among investors in the stock market is dollar-cost-average, which involves buying shares as the price decreases.