Adding contracts to a small losing position

chinook · Aug 8, 2003

Fast Trader,

I suggest you try to adding to your losing position and see how you are handling it.

Let's see, after your second contract got executed:

1) The market keeps going against your position.
a) The P/L column is showing some negative number that you thought you would never see in a trade! Your palms start sweating and you feel knots in your stomach and a voice in your head starts telling you to loosen up your stop. You don't know how it happened, but suddenly you start tweaking the stop....

b) You watch the market and don't touch your stop and get stopped off. You are OK with it because you followed your rules.

2) The market starts rallying in your direction.
a) Again the P/L column is accumulating so fast that you can't believe your eyes. Your heart starts beating and the voice in your head tells you to take profits before reaching your target. You don't. Then the market reverses and heads toward your entry. Your heart feels like its getting squeezed and you start thinking that maybe you're about to have a heart attack. Then the market starts rallying back. You just can't take it anymore and take early profits...

b) You don't tweak your exit and enjoy the runup all the way to your profit target.

Anyway, everybody is different. Experiment with it couple of times, at least to see if you can handle it mentally.

Good luck,

Chinook

EMini-Player · Aug 8, 2003

Well, I tried this on the simulator today trading the ES, and ended up with a nice profit. Although, I was holding 5 contracts of ES. Realistically, I would only hold 2-3. Other than that, all the stops/targets were maintained using AutoTrader. I can post the trades here if someone would like to see.

-FastTrader

macal425 · Aug 8, 2003

Averaging in is ok if it is part of your strategy and you have iron discipline. But if you have any discipline problems then it can be a nightmare scenario.

I recently was 'experimenting' with averaging in on losers. I was doing ok for a while and managed to bring some losers back to b/e or good profit. Until last Thursday when I doubled on a losing position just as ES took a quick drop and quickly took me past where I was trying to put a stop in. Suddenly I was down more than I was willing to lose and lost control of my trading. I quickly doubled again, once again as ES took a sharp drop. Before I knew it i was trading 10x my normal size and was down approx. 6 es pts per contract (my normal stop is 1.5-2pts). At that point I pulled the plug before it got any worse.

Now before anyone pipes in that what I did was stupid, I am well aware of how stupid it was. But, before this happened I was convinced that it could never happen and that I was in complete control of my trading. I was wrong. It can happen and eventually will, if, as I said earlier, you have any discipline problems.

On the bright side, had I not eventually covered where i did my account would have been close to being wiped. As it is, I took a hit but not a fatal one. It has also brought to the foreground some discipline issues that I was not aware I had (or was aware but ignored). At least now I can regroup and address those problems.

So the moral, unless you have a solid plan for averaging down and the discipline to stick with it then don't do it.

EMini-Player · Aug 8, 2003

Quote from macal425:

So the moral, unless you have a solid plan for averaging down and the discipline to stick with it then don't do it.

That makes sense. Thanks.

-FastTrader

donaldduck3419 · Aug 8, 2003

Quote from Fast_Trader:

I'm currently playing around with the mini-dow, and I'd like to know whether it makes sense to add a contract to a losing position to bring your avg cost down. Reason is, it takes a lot of skill to be 100% correct on your entry and a lot of times a position will go slightly against you before it turns in your favor. Here's an hypothetical example:

Short 1 YM @ 9094

YM heads higher and tests resistance at 9100.
Short another YM contract at 9100

So, now you're short 2 contracts at an avg cost of 9097.

Does this make sense when playing the YM? Keep in mind you can still manage your risk so that the overall loss limit remains constant.

Thanks,

-FastTrader

this is called Averaging Down, not a good idea, while it might work out for you a few times. But, one of those times will most definetelly turn into a huge, hugE, huGE, hUGE, HUGE!!!! loss.

Not a good idea, believe me, you're better off taking the loss you already have, stick to your outs.

EMini-Player · Aug 8, 2003

Quote from donaldduck3419:

Not a good idea, believe me, you're better off taking the loss you already have, stick to your outs.

Keep in mind, the initial stop has not changed. The 10 pt stop-loss is still in place. So, when you're down 8 pts, you put on 1 more contract. Your total risk increases by 2 pts, but if it continues in your direction, your reward goes up by much more.

-FastTrader

dbphoenix · Aug 8, 2003

Quote from Fast_Trader:

Keep in mind, the initial stop has not changed. The 10 pt stop-loss is still in place. So, when you're down 8 pts, you put on 1 more contract. Your total risk increases by 2 pts, but if it continues in your direction, your reward goes up by much more.

-FastTrader

Sounds good in theory. Best of luck in practice.

PuffyGums · Aug 8, 2003

Quote from Fast_Trader:

Well, I tried this on the simulator today trading the ES, and ended up with a nice profit. Although, I was holding 5 contracts of ES. Realistically, I would only hold 2-3. Other than that, all the stops/targets were maintained using AutoTrader. I can post the trades here if someone would like to see.

-FastTrader

Trade 5 contracts on ES? Do you know what that can do? I rather try to pet this friendly creature.

EMini-Player · Aug 8, 2003

donaldduck3419 · Aug 8, 2003

Quote from Fast_Trader:

Keep in mind, the initial stop has not changed. The 10 pt stop-loss is still in place. So, when you're down 8 pts, you put on 1 more contract. Your total risk increases by 2 pts, but if it continues in your direction, your reward goes up by much more.

-FastTrader

If you honestly, honestly, believe it is going to go in your direction, whats the point of adding anything? Is it all of a sudden looking more attractive right near the point where you're about to be stopped out?
If you add more contracts and you will get stopped out, you just took a bigger loss that you initially agreed to take when you entered the position originally.

That is, of course if you actually do stick to your out. When it comes to real money, and you see that real number in red, most people will begin shifting their stop. Very few continue to stick to their outs, and like i said, all you'll get is a bigger loss.

What has happened to it since the first time you intered into the position? did the odds of it going in your favour increase? No, because it is near your out. The reasons why you originally entered into that position are now almost gone, and instead of waiting to get out, you are getting in more contracts.

Get out and get in for meaningful reasons, when the odds are in your favour, don't get in when you are losing just because you are lossing. If you trully believe it will go in your direction, than simply wait and take the profit you originally wanted, don't try to take more just because you are losing now, all that will happen is you will lose more. Play around with it more, see what happens.

just out of curiousity, if your stop is 10 pt, whats your profit goal?