The story goes like this. You have a bias for a trade, and it goes against you. You add to the position. It goes against you further. You feel angry. You add more to the position. You have now risked too much on the trade and it sets off a chain reaction of negative behaviour.
How to avoid this.
Plan out your trades using technicals. One way of doing this is to place a buy or sell stop order; where you will exit your trade should price go below a certain technical point. Let us say you have chosen a key technical level to park your stop behind and then price moves below it. Exit the trade. You can always re-enter if price goes back above the support/resistance level. Use your technicals to limit your drawdown.
Plan any further positions at the start. It is perfectly reasonable to add to a position at better prices. However, make sure you plan it in advance, so that your overall risk remains tolerable. Ideally, as a rule, do not risk more than 1% of your account in any single trade.
The danger of adding to a losing position and getting away with it is that you are teaching yourself to do it again. The problem is that the next time the landscape may change, and you are forced to take a loss and it can easily get out of hand.
Remember when you add to a losing position you are only making your draw down worse. If drawdown becomes too high, then you risk starting off a chain reaction of destructive decisions. Remember managing risk well cover a multitude of trading sins.
You can always re-enter a trade.
Kamran Wadud | Financial Markets Trader & Mentor
