I just realized why adding to losers leads to greater losses than those gains realized by adding to winners. When you are adding to a loser, you are trying to avoid losses at all costs. Thus, you are eternally hoping that the trade would go your way. So after you average down and when the price comes to Break Even, the eternal hopeful self won't get out and hold on for more gains. The end result is losing a lot more than what you bargained for. When you add to a winner, you are trying to avoid losses at all costs (or else you would've added onto a loser), and thus when the price bouces back to Break Even, you get out without a loss. You get out prematurely without being able to hold on for great profits. Thus, in the end those who adds to losers lose a lot more, while those who adds to winners doesn't win as much.
Holding on to a loser is the fear of "BOOKING" the loss. The loser (if you are holding and hoping rather than letting a STOP get you out) is not only costing you money, it is also costing you mentally and physically........Your Head is probably steaming and you might not be breathing deep enough to get some more oxygen to the brain..... Many traders make the mistake of reversing the natural bodily and mental reactions from fear and greed. Young blood traders are GREED averse and FEAR seekers. When a trade goes into the toilet they SEEK "FEAR" by holding and hoping. When the new traders get a small profit they become GREED ADVERSE by grabbing the profit for FEAR of it disapearing. Thus there reactions to fear and greed keep them from becoming winners, they defeat themselves.......
It all depends on time frame. When I take a long term trade I only add to a losing position, for daytrading it doesn't matter you just need firm stop in place. And of course, when you take mid to long term trade you have to be very carefull about your entry point. For example, buying euro at 1.36 was very stupid thing to do long term, yet some people probably did and they kept adding on the way down, a recipie for disaster. Now, If you start buying euro at 1.12 and add more as it slides further, you stand good chance of making a "killing" long term.
Scaling in or out (averaging up or down) is an art; therefore it shouldnât be done randomly. In short, if you donât know what youâre doing (no plan) than donât do it.