Adding to positions while they’re still open isn’t something that’s usually a part of the initial trading plan. It’s more of an advanced skill and it can be used for both a winning or a losing trade.
But what many traders underestimate is how this affects them in purely mental ways.
When adding to a losing position – something that is best done with some experience under your belt – a certain amount of hope appears.
You think you can turn this thing around. That this is probably the price level from where things will go your way.
But hope, being an emotion, can have a negative impact on how you make your decisions. Even more so when it goes against your initial trading plan.
Obviously this can lead to even greater losses because it clouds your judgement. Instead of calmly assessing why it was negative in the first place, you throw your efforts at making it right.
If this becomes a habit, then large and frequent losses will pile up.
How can this be avoided?
Set your maximum exposure even before you open a trade. Write down in advance the scenarios where you would increase or decrease a position size. What we mean by scenarios are certain levels that would show another move in the direction you prefer. Elliott Wave analysis offers many such levels as there are always corrective moves opposite the trend.
You should also set your entry and exit price levels in advance and stick to them, discipline counts!
How about adding to positions that are already winners but might seem to have more potential? Maybe they’re riding the trend, or you think they could even speed up more.
One thing that successful traders have in common is that they allow their winning trades run.
But adding to positions does involve risks, not only in pure financial terms but, as we mentioned, also for your mental approach to analysing what is happening with your open position.
Let’s look at this scenario: You have a winning trade that has been open on for about a week and feel that there’s an opportunity to add more to it.
You increase its size but the market starts going against you and within a day the profit you had is almost gone.
This turns the situation on its head. You could start feeling anger and disappointment at a point where you need to be calm, because you have to make a choice: either stick to your guns and your initial prediction or cut losses.
But instead of being in a winning position and deciding what to do at that point, you’ve become anxious and fear might be creeping in. That fear is known as “a winner turning into a loser” in trading circles and it can cause a mental block.
It’s a familiar challenge to traders and everyone comes across it and causes them to exit positions that can – ultimately – become winners.
The solution is sticking to the levels you had already set. Even if the market turns against you, you should already have a stop loss level in mind and you should have a plan about your risk management.
We’re not trying to say “never ever deviate from your trading plan”. But changing it has to be in an orderly fashion, so that impulsive decisions don’t ruin them.
It’s not the market you’re trading against. It’s yourself.