Views on "adding to a losing trade"?

Discussion in 'Strategy Development' started by JangoFolly, Mar 24, 2006.

Adding to a trade that's not going your way at the moment but is still a good trade?

  1. It's always wrong - black and white

    28 vote(s)
    40.6%
  2. Gray can be acceptable if you'd still take the trade

    41 vote(s)
    59.4%
  1. I'm curious how black-and-white folks are on the notion of not adding to a losing trade (please read the example before responding).

    Let's say there's a major break in the market (up or down), and then within the next couple of periods (however a period is defined for your trading style) there's a retracement and you decide you want to open a position in anticipation of the market resuming in the direction of the break. You have set a clear stop loss based on technical levels, and your anticipated reward on the trade is a comfortable multiple of the amount of risk you're assuming (basically, it's a good setup).

    Looking at a chart there's typically more than one point of reference which could provide a good entry on a retracement -- a moving average, trendline, fib level, etc. You decide you want to put on a total of three contracts for the trade, the total amount risked being appropriate for your account size (I'm trying to qualify everything to keep people focused on the question at hand).

    Rather than opening all three at once, would it be acceptable to you to open them in stages, accepting the possibility that the market might move against your first entry point, as long as it stays within your pre-defined stop loss and your feeling about the setup doesn't change, or... is this simply adding to losing trade no matter how it's dressed up?

    Now, I'm not talking about trying to average a losing position into a "good" trade (you can't average a turd and a cupcake into something edible). I also understand this wouldn't be the best tactic for newbies, since you would need to maintain clarity and objectivity about the real state of the market relative to your expectations (i.e., you've progressed past being married to your positions and you know how to cut your losers reasonably well).

    I appreciate your thoughts.


    Regards,
     
  2. How could taking pre-defined 3 contract position with just 1 contract each within the previously refined risk parameters be "adding to a losing trade"?

    If you added more to that 3 contract trade because you don't want to get stopped out on that 3 car position, thats when it becomes adding to a loser.

    It would also be just as severe, if you took profits on 1 car. The risk side of the risk/reward equation is a bit tilted.
     
  3. I spent a lot of time in LBR's room and this is the way she entered many of her trades. That being said I could not make it work for me. If my trade does not go my way almost immediately I want out, but I have a very low pain threshold. I guess the moral of the story is: different strokes for different folks. :)
     
  4. rwk

    rwk

    You're talking about scaling into a position here. I don't do it, but I know many people do. If I were to scale into a position, I would only add the later purchases if the earlier ones were making money.

    Don't do the first purchase until you think the time is right. If it loses money, then you were wrong about the timing. If you're going to be wrong, the smaller you are trading, the better. Once you are right, then start piling in. Just remember that each additional trade has more risk and less potential than the one before.
     
  5. depends what u tradin'...although it is best to avoid addin to losers, on some occasions it's ok imo: on positive earnings if u have already a long trade runnin' from the open and da stock is faded it usually not a bad idea to add at da bottom of da retracement...r/r remains good anyways and on post earnings reports historical fractal patterns show da gap is filled more often than not and stock keeps rallyin' 'till da close.
     
  6. One could take the viewpoint that once your stop limit is in (the technical level where you know the trade is loser) and if your profit target doesn't change in light of small movements of market, then each contract added when your first one is profitable has more risk and less profit potential (you're further from your stop loss and and closer to your target).

    I'm genuinely on the fence about this question, so I'm not pulling for one side or the other. Thanks to everyone for their responses so far.


    Regards,
     
  7. THERUDEBOY

    THERUDEBOY Guest

    There's probably a time and a place for everything in the market. Sometimes i scale in, sometimes i don't. I certainly would not scale in and out of every position.....there is not a need for it.

    It all depends!
     
  8. When trading outrights, I do not add to losers. If I were trading a mean reverting spread I would add to losers. After it gets more than 2 std dev away from the mean I'll start thinking about taking my loss.
     
  9. I wrote this big long cynical rant about the futures industry in general, but rather than focus on what cannot be changed (pragmatically), it is best to focus on what we can control. The two profiles are pertinent to traders who are trying to compete against the multi-billion dollar interests that can scale against the trend all day (read: you can't). I have been both trader 'A' and 'B', and can tell you with remarkable consistency that when I am trader 'B', the results are disastrous. Learn from my mistakes. Be trader 'A', and get in early, add to your winners on pullbacks, and trail your stop at breakeven and better.

    Genuinely, I hope this helps someone avoid the pitfalls of a merciless industry that wants only to take your money. :) I apologize for the crudeness of the diagrams as well as the simplicity of the example, but it could be the most important lesson you'll learn as a retail trader, combined with learning to respect 'Your Risk Tolerance' 100% (not 99.9999%) of the time. How 'Your Risk Tolerance' juxtaposes with current market conditions - well that's another piece of the puzzle. :)

    Having said that, maybe being Trader 'B' can work for you, what do I know about you? I know it doesn't work for me, cut and dry.

    <img src="http://i2.photobucket.com/albums/y12/e647g9i/tradera.png" border="0"></img><br><br><img src="http://i2.photobucket.com/albums/y12/e647g9i/traderb.png" border="0"></img>
     
  10. cnms2

    cnms2

    You should "listen" to the market, and not "tell" it what to do (everybody knows this). When you're losing, the market tells you that you're wrong. By adding to your losing trade you're trying to tell the market where to go, and it'll punish you.

    There are gurus that teach you to fade your entry when you're trading a range bound market, but I prefer to follow the saying: "when in doubt, stay out!". There'll be better opportunities.
     
    #10     Mar 24, 2006