Stock Trading: Why Averaging Down is a Losing Proposition
Many traders, especially those new to the markets, have a habit of "averaging in" to trades that aren`t going their way. The following reasoning is used: If this trade was a good entry at my earlier price, then it must be an even better entry now! On top of that, the trader gets caught up in the idea of improving his "average entry price." Unfortunately most traders learn the hard way that this logic simply does not hold up. This is a natural response that everyone has, which is exactly why it doesn`t work in a market. The reasoning that "this trade was good then so at this price it must be even better" is based on the flawed assumption that the first entry price was a good one. Pride tries to keep us from realizing that the very fact that the position is a loser right now is PROOF that the first entry was NOT a good entry (at least not yet). In fact, the stock or option has moved in the opposite direction the trader thought it was going to move, indicating that either the analysis/reasoning used to take the position in the first place was incorrect or at the very least the reasoning has been weakened by the market action since the position was established. This does NOT mean that the trade is no longer a good one just because you did not make your initial entry at the perfect moment (who does?) -- it just means that you probably shouldn`t be willing to put more capital at risk now that it has started to prove you wrong. The other part of the reasoning, that "this will improve my average entry" is simply a mathematical illusion. By "averaging in", you don`t just move your entry closer to the current price (the part Pride makes us focus on), you also double your losing position (the part we don`t want to see). Instead of 1000 losing shares at 10.25 you now own 2000 losing shares at 10.00 -- BIG DEAL -- you are still down $500 because the stock price is still at $9.75 and now you own 1000 extra shares of a stock that is in a downtrend instead of the uptrend you predicted! Don`t get me wrong, it is not always a mistake to increase your position on a losing trade -- some circumstances (such as the stock sitting right at a very strong resistance or support level) warrant it. If you absolutely must add to a losing position, always do so with the conviction necessary to exit the ENTIRE position quickly should the trade move against you (through that critical support level you saw, etc.) from there. On the flip side of the coin is the exact opposite reasoning and the exact opposite results over time. Adding to winning positions is a practice rarely done by even the most experienced traders, but one that can lead to increased profitability over time. This is exactly the strategy that our Day Trading Systems have used successfully since 2000. The next few times you hear pride telling you to "lock in your profits", double your position and set a stop at your new "average entry". After 5-10 of these trades you will be surprised at what a profitable (and a confidence building) method this can be. Once again, traders who ignore pride and trade the opposite of emotion will reap extra profits and a much more pleasurable trading experience. DON`T MISUNDERSTAND ME -- you will not profit more every time you add to a winner and you won`t lose every time you add to a loser -- I am talking about trading strategies to work OVER TIME -- anything can happen in the window of a few trades.
Other Currency Trading Articles
The E-currency Exchange Business Everyone's Talking About There’s been a lot of talk lately about a program that promises to make business builders and investors wealthy people. The program everyone is referring to is called the e-currency exchange program. What the e-currency exchange program offers is a way to turn a small investment into a substantial amount of money in a relatively short period o ...Earn Thousands Hourly (with a Forex Simulator) Test-driving an online forex demo account is the preferred method of potential traders to minimize risk. A demo account readily allows a cautious person to go online and observe exactly how a paid account would work. Think of it like playing the popular wargame Command and Conquer: you send in the troops (gobs of fictitious money), make a few ...Forex Trading Course - Currency Exchange Made Easy The Forex trading market is a massively demanding setting with potentially massive returns available to the right investor. But even the most seasoned, well-practiced and daring traders still generate losses when they cease to adhere to the principles of Forex success. So where to begin? Before you start this potentially lifelong relationship wi ...The Best Time to Day Trade the Forex Market The three major forex trading ‘sessions’ are as follows (all in Eastern Standard Time):1. New York open 7:00 AM to 4:00 PM 2. Japanese/Australian open 7:00 PM to 3:00 AM 3. London open 3:00 AM to 11:00 AM** Often, the best times to trade is at the beginning 3-5 hours of the above mentioned opening times, because the maj ...Beyond the Random Walk - A New Market Paradigm Proponents of the Efficient Market Hypothesis or "Random Walk Theory" generally have two lines of defense when it comes to supporting the idea that technical analysis of the markets cannot improve returns:The first is that they have tested many TA indicators and have not found any that are able to lift returns significantly enough to over ...Simulated Forex Trading Uses Simulators As A Guide For Traders (Part I) There are plenty of people trading in the forex, and why not, there are so many reasons to do it. By trading in the forex demo you are able to start by using a free demo on real time, you have a leverage of 400:1, or another simple reason is just getting into the action and trading with international currency. However, even when you pra ...Mechanical or Discretionary Trading - Which is Best? Discretionary TradingPure discretionary trading will rely solely on the traders judgement. For example a discretionary trader may spot a particular pattern developing on a chart and decide to enter a trade on that basis. It would be impossible to systemise their trading because it relies on subjective judgements and 'gut' feel. ...How to Protect Yourself Against a Falling U.S. Dollar If you use U.S. dollars in large quantities either as an American living in the U.S., or if you are a businessman that lives outside of the U.S but pays vendors in U.S. dollars, or if you are an American expat living overseas crying buckets everyday as the dollar buys less and less of the foreign currency of the country you are living in, then t ...What's the .382 Fibonacci Ratio in Forex Trading? It was mentioned in a past article that Fibonacci forex trading is the basis of many forex trading systems used around the world by profitable forex traders. These systems are all based on the famous Fibonacci ratios (.236, .50, .382, .618, etc.) and each of them can specialize in a particular ratio along with other minor indicators in order to ...Forex Mechanical Trading Systems That Make Money In essence forex mechanical trading systems are designed to make trading decisions for you. However is letting a software program that runs on auto pilot a good place to put your fiscal responsibilities as an investor?Obviously the idea of having trading software is irresistible to most people as it is very appealing to think of your deci ...A Sneaky Way to Steal Someone Else's Forex Trading System Anyone who is serious about trading needs to have a Forex Trading System that is tailored to them, but there is no reason to start constructing your Forex trading system from scratch.Why try and reinvent the wheel when you can benefit from other traders years of experience and borrow your trading system’s ideas and concepts?It’s ea ...Day Trading Futures Day trading used to be the sole domain of the floor traders. They always have the advantage of bargains on commodities. They have the advantage of being able to judge the market breath, and thereby make the proper predictions with the correct price for a stock. However they don’t get any commission or pay any commission.The trend has chan ...Trading Foreign Currency FOREX trading is about trading foreign currency, stocks, and similar type of products. The currency of one country is weighed against the currency of another country to determine value. The value of that foreign currency is taken into consideration when trading stocks on the FOREX markets. Most countries seem to have control over the value of th ...Energies Seasonal Trends – Trade For Bigger Profits! Seasonal trends give traders an extra tool that can be used to pinpoint the high reward low risk trades.There simple to understand and easy to use and can increase profit potential dramatically.Last week one of the best seasonal tendencies returned over 14%!If you have never looked at them you need to - They are great profit tool f ...The Right Mindset Adopt It and Make Huge Profits Now! One trader who had the right mindset was W D Gann and he built a $50 million dollar fortune.What actually do we mean by the right mindset? Well let’s consider a startling fact first:Fact: 90% of traders lose because they cannot control their emotions. Getting the right mindset is essential and will help you make big profits ...Savvy Tactics to Minimize Whopping Forex Losses Forex trading has one goal: to make money. Unfortunately, like any speculative venture, there is a potential for loosing money. The same holds true with the stock market the commodities market, and the money market. Any investment that entices of great gain poses a certain level of risk. As a forex trader you want to minimize your chance ...Adventures in Global Exchange Traded Funds Global exchange traded funds are not as complicated as the name implies. Below are some easy steps to creating a successful and profitable ETF portfolio. For anyone who is interested in any type of investing is it important first create and maintain a rainy day fund. This is 6 months of income placed into a money market account or placed in s ...International Trade and Its Barriers First we will discuss the concept of trading. The trading concept is centered on the simple activity of the exchange of good or services or both. These exchanges may be the ones that simply take place between two parties within the country or between two different countries. The simple trade, which takes place between two parties, is known as bi ...Natural Gas – Crude Oil Takes Off Natural Gas Set for Huge Gains to! Crude oil and unleaded gas exploded to the upside today as we thought, but can Natural gas follow? Not only can it follow it has massive upside potential in its own right! Let’s examine why and how you could get in on this exciting opportunity.We have been bullish of this contract for some time and entered a while ago, below the breakout ...Day Trading Day traders are people who buy and sell stocks all day long. The goal of a day trader is to buy stocks that fluctuate in hopes that the value goes up and the trader earns money Day traders can make profits very quickly. A day trader will hold a stock anywhere from a few seconds to a few hours, but will always sell all stocks before the close of ...Learn E-Currency Exchange To Make Money: Is this a Scam? Should you attempt to learn e currency exchange trading if the system a is just scam? Is what many courses like Matt Gagnon's mazu are promoting a scam? If not, why are there rumors of e currency exchange being a scam?If you have asked yourself questions along these lines then I highly recommend you keep reading my review for whether you ...How to Achieve Currency Trading Success: Part 1 Currency trading success can be achieved by anyone, as everything about trading currencies can be specifically learned, by any trader wishing to put it in the time and effort to do so.Trading currencies successfully is a combination of two factors:Firstly, you need a successful trading method for long term currency trading success ...Minimize Your Forex Trading Risk Through Forex Training There are many ways to fail in trading and investments. Unforeseen market fluctuations, lack of experience, unpredictable political changes (as well as a faulty internet connection) can all reek havoc with a first time trader. But once equipped with proper Forex training you can begin to minimize this risk, and turn potential pitfalls into gains ...Getting a Forex Trading Education Many Americans are interested in getting involved in forex trading. Before doing this, you should get a forex trading education. You should never get into forex trading without forex trading education. With the proper forex trading education, you can be on your way to making a tidy profit.First you need to understand what forex trading ...A Review of Automated Forex Brokers Several companies offer automated forex broker services. In the following articles, you'll find brief reviews of each.What forex brokers offer automated services?GFT Forex is an automated forex broker, whose DealBook FX 2 software offers the investor both a demo and a live forex trading tool in the currency market. This forex trad ...How To Handle A String Of Losses Everybody hates to lose and unfortunately no one is blessed with the ability of foresight, therefore losses are an unavoidable part of trading. When we enter a trade we will either be right, or wrong, and even if we broke-even we'd still be classed as being wrong - as nobody enters into a trade just to break-even! When unsuccessful traders enco ...The Secrets of the Super-Traders The first and perhaps most important “secret” is to realize that your methodology or approach (no matter how good) is only part of being a highly successful trader. This applies to any trading style including, day trading, swing trading or position trading.The simple fact is that a bad trader can screw up a fantastic trading system. Conv ...Bollinger Bands – How to Use Them to Make Massive Profits Bollinger bands will help you to predict big trending moves, act on big trend reversals and finally, time trading positions with greater accuracy for bigger profits.Here we have related Bollinger bands to the currency markets (as it is here that they are most useful) - but they are useful in all financial markets.What are Bollinger ...Who Should Trade a Mini Forex Trading Account? A mini forex trading account is designed for those who are new to forex trading or when the trading account balance is less then $10.000.Mini forex account key points- Only $250-$300 to open - Up to 200:1 trade leverage - 1 pip = $1 for EUR/USD and GBP/USD - Smaller trade sizeMini fore ...Forex Day Trading Money is a fundamental product. Anytime anyone buys or sells products and services in a foreign country, foreign currency trade comes into play. This is simply exchanging of one currency for another. Many people trade currencies for speculative purposes. Because hundreds upon thousands currency transactions go on every day, the foreign currency ...Futures Options Trading A forward contract is a customized contract between two parties to buy or sell a specified quantity of a particular commodity at a specified price on a specified future date. Futures are exchange-traded forward contracts, i.e., forward contracts done in organized exchanges like stock or commodity exchanges.A futures contract is standardiz ...Currency Trading: How To Get Rich And Powerful From Currency Trading Program What is currency trading?How can you get rich and powerful from currency trading?Who can do currency trading?Can you do currency trading from any country of the world?Until six years ago, when the United States Congress passed a law and made it possible for the small investors and average citizen to participate in th ...
|
