Scaling Out, Stop Loss Management, and the Best Approach for Prop Firm Traders
Key Considerations in Target Selection
Probability vs. Reward – If the win rate is high, all-in, all-out at a reasonable R multiple can be beneficial. If the win rate is lower, scaling out helps smooth the equity curve and improves consistency.
Impact of Scaling Out on Overall R-Multiple – Taking partial profits early reduces the average R-multiple per trade. Holding for large targets increases risk of missing profits when price reverses before reaching those targets.
Market Type and Trendiness – If the market has trending characteristics, holding for a higher R-multiple makes more sense. If the market is choppy, taking partials earlier (0.5R, 1R) can be beneficial.
Evidence-Based Approaches
A Monte Carlo simulation using randomized trade outcomes with an assumed win rate of 50% and risking 1% per trade showed two superior strategies:
Scaling Out at 0.5R & 2R – Provides smoother equity growth and lower drawdowns.
Scaling Out at 0.5R, 1R & 2R – Offers more balance but slightly lower total returns.
Why Scaling Out is Superior to All-In, All-Out at 1R or 2R
All-In, All-Out at 1R
Taking full profits at 1R can increase the win rate, but it significantly reduces overall profitability.
By not letting winners run beyond 1R, the strategy fails to capitalize on larger moves that offset losses.
Limits long-term growth and is not optimal in prop firms where consistent gains are needed to survive drawdown rules.
All-In, All-Out at 2R
While this strategy maximizes R-multiple when successful, it creates more volatility in equity growth.
Losing streaks can wipe out multiple winning trades, making it harder to maintain consistency under prop firm trailing drawdown rules.
Large floating profits that reverse before hitting 2R can lead to frustration and missed opportunities.
Money Management and Position Sizing for Scaling Out Approaches
Scaling Out at 0.5R & 2R
Risk 1% per trade.
Take 50% off at 0.5R → Locks in small profit early.
Hold 50% for 2R → Allows for larger wins.
Example: Risking $500 per trade
First exit at 0.5R → Gain $250
Second exit at 2R → Gain $1000
Total trade gain = $1250
Scaling Out at 0.5R, 1R & 2R
Risk 1% per trade.
Take 30% off at 0.5R, 40% off at 1R, 30% off at 2R → More balanced approach.
Example: Risking $500 per trade
First exit at 0.5R → Gain $150
Second exit at 1R → Gain $400
Third exit at 2R → Gain $600
Total trade gain = $1150
Stop Loss Management: Should You Move Stops to Break Even or Let the Trade Play Out?
Pros of Moving Stop to Break Even
✅ Eliminates risk – Ensures that you don’t take a full loss once a trade has moved in your favor. ✅ Reduces psychological stress – Knowing you can’t lose on the trade helps traders remain emotionally stable. ✅ Works well in choppy markets – Protects capital in volatile conditions where price frequently reverses.
Cons of Moving Stop to Break Even
❌ Increases chance of getting stopped out before the move completes – Markets often have natural pullbacks before hitting higher targets. ❌ Creates a false sense of security – Just because you’re at break even doesn’t mean the trade has no cost (missed opportunities are still losses). ❌ High volatility can knock you out before the real move happens – A normal retracement might stop you out before the trade runs to full profit.
Should You Move Stop to Break Even After Hitting T1?
Option 1: Move to Break Even After Hitting Target 1 (T1)
Works well if you're risk-averse or trading with a trailing drawdown.
Helps avoid unnecessary losses once partial profits are taken.
Ideal for choppy or range-bound markets where reversals are common.
Option 2: Let the Trade Play Out
Best for trending markets where price needs room to breathe.
Allows for maximum R-multiple potential without premature exits.
Works well when the strategy has a high probability of reaching T2 or T3.
Best Practices for Stop Loss Adjustments in Prop Firms
If Trading Under a Prop Firm’s TDD Rule → Move the stop halfway to break even after hitting T1.
This keeps some breathing room while reducing risk.
Stops you from getting stopped out too soon on minor pullbacks.
If Trading High-Volatility Markets → Keep your stop at the original level until T2 is hit.
This allows full range movement without choking the trade.
Moving too soon increases the risk of being stopped out on natural volatility.
If Trading a Choppy or Range-Bound Market → Move to break even immediately after T1.
This prevents taking unnecessary losses in an indecisive market.
Works best if scaling out at multiple targets.
Managing Trades Under a Trailing Drawdown (TDD) Rule
When trading under a prop firm’s TDD rule, capital preservation should be the priority.
Best Approaches:
Scaling Out at 0.5R & 2R to Lock in Equity Early – Helps avoid large swings in equity that could trigger the trailing drawdown.
Scaling 30% at 0.5R, 40% at 1R, 30% at 2R – Reduces big swings and allows for consistent growth.
Avoid Large Floating Profits That Reverse – A trade running up to 3R before reversing and stopping out can lock the TDD at an unfavorable level.
Reduce Position Size When Near a Drawdown Limit – If close to the TDD cutoff, cutting position size in half helps stay afloat.
Final Consideration
For maximizing growth → Scaling Out at 0.5R & 2R is superior.
For more stability & consistent small wins → Scaling Out at 0.5R, 1R & 2R is safer but less profitable.
For stop management, avoid moving to break even too early unless in a choppy market or under TDD constraints.