Wrong forex strategies: Don’t average down losing trades

Trying to correct a losing trade by doubling down with a lower entry price is another popular mistake. Too-much self-belief in the original trade idea, stubbornness, or the need to avenge initial losses lead traders into rushed decisions that tend to lack discipline. Our analyst Yohay Elam recalls this kind of trade as his worst trading mistake:

"I opened a Long position and began losing almost instantly. Nevertheless, the price stabilized and kept a safe distance from the Stop-Loss point. I thought that if I buy some more at a lower, more attractive price, I would lower my average entry price and eventually make an even bigger profit. I also lowered my Stop-Loss point, which is also a big no-no you have probably heard about.

Another small slide triggered the same behavior: averaging down once again and another downgrade of the Stop-Loss. Did the price then go up? No. It did not tick down either, but just crashed and hit my Stop-Loss. Eventually, I lost more money than I had planned even though the average price was lower. After the trauma, I never did this again.

There are quite a few things that are wrong here. First, you want to cut your losses quickly and let your winners run. By averaging down, you risk letting your losses run. In addition, by adding to the position, you ""marry"" it. The extra funds you put into it leave less room for other trades. It also leaves less room for any other ideas, as you are worried about the trade. All in all, averaging down can turn into a vicious cycle that you better avoid."

As Yohay points, averaging down a losing trade usually comes with lifting your stop, which heavily increases the risk of the position, normally a recipe for disaster. Boris Schlossberg, managing director and founding partner at BK Asset Management, summarizes this situation perfectly:

"The worst mistake I ever made has always been the same - lifting my stop. That always is followed by adding to the position to "even out" the price and inevitably to much bigger loss than I would have had initially. The single best advice ever given to me was - the first loss is the best."

Accepting losses is tough, but it might be one of the best skills a trader can develop. Humbleness and a limited sense of self-belief can help you avoid mistakes like the one Brandon Wendell, senior instructor and trader mentor at the Online Trading Academy, did back in the late 90s, when the tech bubble was in full swing:

“The biggest mistake I ever made while trading was to move my stop on a trade where I “knew” I was right. I knew that the markets were overheated and due for a correction or crash. My target for shorting was Qualcomm, as I lived in San Diego at the time and had many friends who worked for the company that suddenly were showing up, with new homes and cars from the profits of their stock ownership.

I shorted the stock, never thinking it could get to $1000 a share. As price moved closer and closer to my stop, I loosened the stop to stay in the losing position because I knew I was right and the markets would realize it soon enough. Finally I realized I couldn’t take much more losing and exited my position for a $32,000 loss! It seemed like hours but the whole trade took only 15 minutes!

So it was a very expensive lesson on discipline and sticking to your original plan. Had I maintained the stop, I would have lost only $1500 in the trade. The problem with moving stops or trading without them is that you are then relying on emotion instead of logic. Logic makes for good trading. Emotions make for good stories!”

Hey, at least we could use Brandon’s story for this article. This is where this kind of trading mistakes end up. Not that bad.