Greed and Fear - Daily trading signals based on mathematics and software, no opinion, no emotion, no ego.

losing money1Before taking a trade, you should have done your analysis. If the analysis shows that the trade has a high probability of being successful, you enter it and see what happens. Now suppose the market moves away and your position is getting worse. No real problem, there is never any guarantee the analysis will work.

Many traders find it tempting to add to their (losing) position at this point. This could be dangerous. You can only add to your position if the analysis said so and never because of the simple fact the market is moving away. Any 'adjusted' analysis during stressful moments should be distrusted, because most likely it is your ego speaking: it is not willing to accept failure.

So for instance, if the analysis has determined a zone in which there could be support, than it's ok to buy in that zone, and to keep adding to a losing position. But once the stock/index gets below that predetermined buying zone, you have to stop adding. At this point the market is starting to say: “Your analysis is probably wrong, there is most likely no support here.”

From now on in this trade, you can only watch. If the market keeps going the wrong direction, your stop will get hit and your loss is maximized. Otherwise, enjoy the success of yet another good analysis.

Recommended reading:

Always use a stoploss: Stoploss!

Lizards and pigeons: Science of irrationality