It is an easy trap to fall into

The story goes like this. You have a fundamental 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

1. Plan your technicals. One tip for this is to place a stop where you will exit your trade should the price go below a certain technical point. Let’s say you have chosen a key technical level to park your stop behind and then the price moves below it. Exit the trade. You can always re-enter if the price goes back above the support/resistance level. Use your technicals to limit your drawdown. Here is an example.

2. 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 general rule, don’t risk more than 1% of your account in any single trade.

3. 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.

4. Remember when you add to a losing position you are only making your drawdown worse. If drawdown becomes too high then you risk starting off a chain reaction of destructive decisions. Remember managing risk well covers a multitude of trading sins.

HYCM Lab is a financial analysis source that provides regular insights on how global news affects the markets including forex, commodities, stocks, indices, and cryptocurrencies*. Run by the HYCM team, it equips traders with everything needed to make informed trading decisions.