Is it okay to spread a losing trade?

Discussion in 'Trading' started by Joe Ross, Oct 30, 2009.

  1. No way! While it is good trading to spread a winning trade if you feel the need to hedge your position, never spread a losing trade. Simply exit the market. The usual net result of spreading a losing trade is that both sides may be taken off at a loss. If you cannot admit you are wrong, or know at what price your trade is wrong, you have no business trading. Spread trading is best initiated after the spread trend has been defined and both legs of the spread are entered and exited "Market on Close." Spreading a loss converts one mistake into two.

    When might you want to spread a winning trade? You do so ahead of a report which might have an adverse result on your trade. You do so when you hear a rumor or piece of news that might cause the trade you are in to turn from a winner into a loser. When you do that you are hedging, the very reason for which futures markets were created. Futures exchanges were created as a place where producers and users could spread.

    Why not just get out and get back in after the report? Because it is often best to “stay in the water” if you want to catch the next wave. If you are in a spread, you are already “in the water.” If you get out, you run the risk of not being able to get back in. I've seen it happen dozens of times. A trader gets out ahead of a report. The report comes out and the market gaps up or down and then it becomes difficult to get in at a decent price.

    Another advantage to spreading a winning trade ahead of a report is that, if the report causes a major disruption in the direction of the trend, you can always drop the losing leg of the spread and keep the winning leg.