The truth is, adding to losers from the long side pays off over time. It doesn't work as well from the short side. Yeah. I know. It's a terrible trading practice...etc, etc... but it does work, if done correctly. What is correctly? Figure it out. I have years of profits from this tactic, but it ain't for everybody! Good luck all. C
I don't agree. The only clever thing to do is never add to a losing position. Your system should be good enough to take the right direction, so if you loose you should get out. If you get out regularly on a stop and the trades becomes profitable afterwards, than the only conclusion is that you should work on your system, not on your stop. It proofs that your system has a bad timing. Taking stops should give in backtesting a smaller loss than staying in these trades.
But one day you will catch "the mother of all losses" and your account will be wiped out. Examples? Enron, Worldcom, Parmalat..... Perhaps you can give examples of succesfull adding to losers, and i will tell afterwards what you should have done.
Nope. Ain't gonna happen. This is certainly a concern, but not when you only use 5% of account for the whole position. Can't be too careful! Well, I can tell you one that isn't working: FWHT OUCH!
Please read my post again with a bit more care. Not just read my nickname. Do you know what is a RED postion? By reading your post (quoted above)I know that NOT ONLY YOUR SYSTEM IS BAD BUT ALSO YOUR STOP IS BAD. Be honest to yourself.
well it depends if your position is right or not and how deep one's pockets are. right or wrong depends on timeframe. jim rogers was short the homebuilders as it continued to make 52 week highs and recently reiterated his bearish outlook. he claims to be a bad trader, that his entry points are often bad. i wonder to what extent he added to that loser. i'd guess he'll be in the money sometime next year.
Adding to a loser may only work for short term trading, and still need control it within your stop limit.
As someone on ET wrote some time ago, "Only losers add to losers." Otherguy, the problem is you were certain you knew what was going to happen next. As the author, Mark Douglas (Trading In The Zone) points out, successful traders understand and accept as fact that anything can happen. Run down to Barnes & Noble or Borders, and peruse Chapter 6 of Douglas' book, Trading In The Zone. I bet you buy it on the spot.
That's a harsh way to put it. The fact is, unless you have been in the business for a long time and your emotions are not clouding your judgement (it takes a lot of hard years to get there), they you are not able to process feedback from the markets while sitting in a losing trade. Your perception cannot be the same when you are in a loss as it is when you are in a trade that is in the money. Hence, anything less than making sure that your risk is covered BEFORE you put on the trade is just pure trading-suicide. The bulk of your energy should go into avoiding these kinds of situations. The market is a statistically losing proposition, so you must come in and trade while being mindful of your downside risk. You must know your exit before your entry. I don't position or swing trade. I scalp... a lot. This is an issue that I have to take into account while I trade. I put on about 500 trades per day on average. I am aware of my downside on 99% of those trades before I put them on. Don't hesitate to click when things don't go as you expected to get yourself out. If you ever want to become a professional at everything, your primary focus should not be "how much you can make". Rather, your focus should be "how much should I risk for what I think I can make". Good luck.
i agree with what mschey said. it depends on the situation. i've had many fills during opening where a large step down seller obliterate the thinly traded stock, and within minutes sold 20-30 cents below the open. i naturally add to the position once i see the selling is contained. and the stock trades back up to where it had open if not more. i've also added to positions at price points where i told myself this level is considered to be a "breakdown". i still let the order filled and prayed for its return. those are the days i usually get a good spanking out of it.