February 10, 2010 11:03 AM
3. Your first Loss is your best loss. Never ADD.
Losses are part of any type trading. Some are bigger and some are smaller. Every loss hurts, it does not matter whether it is big or small. Learn to respect them and try to minimize them.
A Planned ‘Entry’ leads to a Planned ‘Exit.’ Before you enter into a trade, you have plenty of time to think about Entries/Exits. Once you are in a trade, you have limited focus and may not make rational decisions for the exits (loss/profit).
If you have planned your trade ‘Entry’ with multiple entries/lots at multiple levels, then ‘ADDING’ or ‘Scaling Up’ is part of the plan. Adding is part your strategy. You must know ‘ADDING’ levels and size BEFORE you place your first order. You must also know how you plan to EXIT this trade.
If you are adding more shares/contracts because of a losing position and DID NOT PLAN then averaging down becomes gambling. Most traders blow out their capital by Forced-Adding process. This obviously leads to many psychological issues (Poor discipline, Gun-Shy:Afraid to pull-trigger, Overtrading, Premature Entries/Exits etc.) If you see a Loss at your ‘STOP LEVEL’, get out of the trade than ADD. Never HOPE that this trade will turn-around. 7 out of 10 times, it will NOT turn-around and will end up in a bigger loss. If you have planned ‘STOP’ ahead of your trade, you will feel confident during the trade
and may come back to trading with cooler head at a later time/day, in case of a loss.