# Using a Scale Order

A scale order is a method of triggering purchases based on a security's price over a given period of time. Essentially, an investor or trader can create an order that will instruct of portfolio to either purchase or sell a certain number of shares for every incremental change in price. This method allows the trade to occur without involvement from the trader at each step along the way. It also limits losses that may have otherwise occurred due to a lump-sum purchase.

Scale Order Example

John currently holds 100 shares of Security A he purchased for \$3 per share. He believes the security will continue to rise in price throughout the trading day, and he would like to sell the security as it rises, but he does not want to sell too quickly. Therefore, he sets a scale order that will initiate the sale of 10 shares of Security A for every increase in price of \$1 per share.

The first sale is made when the security rises from \$3 per share to \$4 per share, and John's portfolio sells 10 shares each at the profit of \$1. Later in the day, the security rises again to \$5 per share, and John's scale order automatically sells another 10 shares, making a profit of \$2 per share, or \$20 total on this portion of the trade. This can continue for a limited period of time or until all of the shares are sold.

Benefit of a Scale Order

If you see the price of a security rise, you may be tempted to sell your shares, but you may also be wary of the possibility the price may rise even further. Instead of anxiously watching the security all day, you can place a scale order that will sell a small number of shares each time the price rises. In the example above, imagine Security A continued to rise in price to \$7 per share, and then it experiences a drop back to \$5 per share.

If John had held out entirely hoping the security would reach \$8 per share before selling, he would have run the risk of losing profit. Instead, with the scale order, he was guaranteed to profit at each increment along the way. He earned \$10 on the first trade, \$20 on the second, \$30 on his third, \$40 when the security hit \$7, resulting in a profit of \$100. If he had waited until the security hit \$8 to attempt to sell, then rushed to sell once he saw it drop to \$5, his profit for selling the same number of shares would have been \$80.