www.varchev.com

Adding to a losing position? – in which cases this might not be so bad

/ The article is intended for novice traders. You can view more training articles here: https: //www.varchev.com/trading-uni.htm /

Traditional trading wisdom is to never average a losing position. When the loss reaches a certain point, it is better to accept the loss and look for new opportunities. But there are some exceptions to the rule.

Most market players have a natural tendency to add to a weak position. There are several reasons for this. In behavioral analysis, the pain of loss is thought to elicit approximately twice as much emotional response as the pleasure of gain.

We feel losses much more intensely than we feel gains, and this makes us avoid making mistakes. It is less painful to hope that our choice is not a bad one, and that the market will soon see that we are right. We cling to hope and avoid admitting error. Moreover, some market participants add to the position while it is at a loss, believing 100% that they are right. There is no such thing as 100% chance in trading and this is the biggest mistake that beginners make.

Most traders suffer their biggest losses because of this tendency to avoid pain. They keep adding to a losing position and finally give up when the loss is significant and the pain becomes too great. Discipline and planning are thrown out the window and emotions drive decision making.

A total ban on averaging a losing position is probably a good idea in most cases. Placing a hard stop is the best option and if it is hit, we take the loss. We can always re-enter a position, but stopping will give us time to make a more objective assessment.

The problem with this approach is that a good position is often abandoned simply because there is increased volatility. A stop is good in some situations, but would not be effective for volatile instruments that move a lot on a daily basis.

Alternative

An alternative to the prohibition against averaging is to plan in advance to build a position with a series of purchases. The initial buy is small and there is plenty of room to buy several more times in subsequent volatility.

When we first enter a position on an instrument it is good to think that the entry point is suboptimal and that the stock will not go straight up from the entry. This gives freedom to add at lower prices several more times.

The key to this approach is that there still needs to be a stop moose. We can’t just keep buying more and more. The position size must be controlled and the loss cannot exceed a certain level. Even if you buy primarily based on fundamentals, there is a time when it is good to admit that maybe the analysis is wrong, when the price continues to unilaterally show the opposite signs of our analysis.

Like most things in trading, there are two considerations here – plan and discipline. If we make a plan and stick to it, then we can handle anything the market can throw at you. Placing hard stops and avoiding averaging a losing position is a very good plan, but there are other ways to approach the situation, but they require advance planning and strict discipline.

/ The article is intended for novice traders. More training articles can be found here: https://www.varchev.com/trading-uni.htm /


 Head of Trading Dimitar Kalapov

Login to comment

* Rough, sarcastic and ironic language is not allowed. For such Admins Delete without notice.

Leave a Reply

Comments:

Leave a comment

Varchev Absolute Trader

борсова платформа

  • Търгувай над 3000 финансови инструмента: Crypto, Форекс, Акции, Индекси, Суровини, ETF-и
  • Използвай платформа с директно изпращане ордерите на борсите
  • Best Trading Platform - "Online Personal Wealth Awards" EU награждава Varchev Absolute Trader
  • Cloud base платформа - твоят трейдинг сетъп на всяко устройство
  • Traders Talk - чуй какво движи пазарите в реално време
  • Market Sentiment - търгувай с настроенията на инвестиционите банки
  • Top movers - най-горещите трейдове във всеки един момент
  • Stocks scanner - филтрирай най-подходящите за твоя трейдинг стил пазарни инструменти
  • Heat map - Търгувай в посоката на големите играчи


Read more:
RECCOMEND WAS THIS POST USEFUL FOR YOU?
If you think, we can improve that section,
please comment. Your oppinion is imortant for us.
WARNING: Any news, opinions, research, data or other information contained within this website is provided as general market commentary and does not constitute investment or trading advice. Varchev Finance Ltd. expressly disclaims any liability for any lost principal or profits which may arise directly or indirectly from the use of or reliance on such information. Varchev Finance Ltd. may provide information, quotes, references and links to or from other sites and blogs and other sources of economic and market information as an educational service to its clients and prospects and does not endorse the opinions or recommendations of the sites, blogs or other sources of information.
Varchev Finance
chat with dealer
CALL NOW
?>