Isn't adding to a winning trade a bad idea?

Discussion in 'Strategy Development' started by sKaLpZ, May 10, 2005.

  1. I know this subject has probably been posted to death here, but I have a couple questions anyway that I'd like to get your opinion on.

    Let's say you entered a trade.

    And luckily it went into your favor, for a round number we'll make it 100 points (that, unbeknownst to you, was the high point of this garbage item you were trading).

    So, you figure, Hey, I'll add to this winning trade.

    So you take out another position, upon which the market finally catches up to your brilliance and retraces 25 points, taking your new position with it.

    But, you say to yourself, after all, this IS a "winning trade" so you add to it another position.

    Yes, I know what you're thinking, the price DOES fall still another 24-points AFTER you enter again.

    At this juncture you seriously have to ask yourself "Is this STILL a winning trade??"

    Since it has 49-points losing, and 51-points "winning" you convince yourself it is just a minor flucuation on your way to retiring in Tahiti.

    Suddenly the market decides retiring in Tahiti is also a good idea so it empties ALL its positions in the item you were previously in a winning trade in, taking so much profit out of the instrument there is a one-day loss of an extra 200 points.

    (Yes, this was a costly thing you bought and it didn't help that the CEO/Founder was just caught embezzling $200,000,000 from the company over the last 6 years having successfully covered the company's numbers via the accounting department his brother-in-law Billybob works in).

    My question is, Is this NOW still considered a "winning trade?"

    If so, what would you do about your massive paper loss? Add to it on speculation because, "Hey, at least it I WAS in a winning trade ONCE!"?

    If not, why not?

    sKaLpZ
     
  2. It's a losing trade isn't it?

    I never add to winning trades. That is just my style. I do add to losing trades as long as my initial stop isn't hit. I never add to losers once my stop is hit.

    I hope we get many more responses to this. It is a very interesting question.
     
  3. Adding positions isn't my style either. However, the following article contains a discussion regarding "pressing your winners" which you might find useful.

    http://www.futuresmag.com/futuresclassroom/phantom/phantom.html

    The "pressing your winners" discussion is located under "Rule Two."

    Hope this helped.

    - Spydertrader
     
  4. Yep...it sure has been.

    Usually the same type of responses.

    I myself will only ADD if its another trade signal.

    Simply, I don't just ADD for the heck of it without any trade signals.

    Then when I do ADD...its a lot smaller in size in comparison to the original trade.

    Next...I manage the ADD as if it was the only trade with just a small difference in the trade management...

    As soon as the ADD reaches either its own profit target or the profit target of the original entry (whichever comes first)...

    I dump the ADD (bank the profits) and then go back to managing the original position as if the ADD had never occurred.

    I've been doing the above for many years with consistent success.

    NihabaAshi
     
  5. POP is great reading imo

    didn't help my trading one bit

    but great reading nonetheless:)
     
  6. "So, you figure, Hey, I'll add to this winning trade....." is not exactly a winning trading plan. I scale in and out all the time. The added position must be taken on the same signal or conditions as the initial trade. If the initial trade is a "figure I should get long here" type of trade, then eventually the market will catch up with the account.
     
  7. Pyramiding and scaling in to a trade are excellent ways of controlling risk and of making the most out of winning trades. However, if they are done incorrectly and don't work out, one shouldn't assume that they are poor tactics.

    Based on what you've posted, you added to the position at the wrong time. Rather than add to it just because it's going the way it's supposed to, add, for example, at the first retracement and move your stop, for example, behind the swing low. This protects your profits, minimizes your risk, and puts you in place for whatever continuation might be in the making.

    There are many variations to this, of course. Whatever suits.