Conviction and averaging down

D

DayTraderNYC

I am interested in hearing about how to avoid one of the biggest pitfalls of trading.

One of the biggest problems I have with trading is having a "conviction" on the direction of a stock and continue to add to a losing position until I can't take it anymore and close it out at the worst possible time with a big loss.

What do people do in order to avoid these disasters? When do you call it quits? When the stock moves past the MA? When you are down $1000 on the position? Perhaps you never add to losing positions? But if you never add to losing position, you will lose many great prfitable trades as well. What is a good compromise? Or maybe there can not be any compromises in trading....and you should never add to losing positions...

Open to suggestions....
 
Try setting stops after entry, and only double down after you get stopped out. Get stopped out on the double, then triple down after it's gone even lower. Anytime you enter at a higher price than your previous stopped out level, you can only buy one unit. A modified martingale perhaps, use at your own risk . . .
 
I can say with conviction that adding to a losing position is ABSOLUTELY the primary cause of my biggest losing days -

God help me that I NEVER do it again.

It's like going from "wrong" to "massively wrong" and the worst part is, I volunteered to give up MORE of my money on a bad trade.

Oh yeah, sure, it's worked out a few times to help me get even on a trade.

But the times it hasn't worked (1/2 the time) it has created compound losses that were much larger than the ones I would have had if I had just properly taken small losses when the trades went against me.

Overall, adding to losing positions has cost me thousands of wasted dollars.

It most cases it would have been better to reverse position and double up in size (assuming I wasn't "chasing").

Paul
 
funny. I find that ignoring my conviction is pretty costly. Opinion is one thing, conviction is something else completely. I think some think the two are synonymous.
 
Originally posted by DayTraderNYC
I am interested in hearing about how to avoid one of the biggest pitfalls of trading.

One of the biggest problems I have with trading is having a "conviction" on the direction of a stock and continue to add to a losing position until I can't take it anymore and close it out at the worst possible time with a big loss.

What do people do in order to avoid these disasters? When do you call it quits? When the stock moves past the MA? When you are down $1000 on the position? Perhaps you never add to losing positions? But if you never add to losing position, you will lose many great prfitable trades as well. What is a good compromise? Or maybe there can not be any compromises in trading....and you should never add to losing positions...

Open to suggestions....
More...
More mylanta trading?

nitro
 
It sounds like you're using the term 'conviction' in place of : "I'm right and the market's wrong".

If for example, I'm bullish, and the market is going against me even one tick, I'm looking for a place to get out. It's OK if I puke and remain bullish, because it's obvious to me that I'll be able to buy them cheaper than I had them before.
 
Originally posted by profitseer
learn all the rules and then figure out which one you're the best at breaking
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that's a classic. I may quote you sometime, with permission.
 
Originally posted by DayTraderNYC
I am interested in hearing about how to avoid one of the biggest pitfalls of trading.

One of the biggest problems I have with trading is having a "conviction" on the direction of a stock and continue to add to a losing position until I can't take it anymore and close it out at the worst possible time with a big loss.

What do people do in order to avoid these disasters? When do you call it quits? When the stock moves past the MA? When you are down $1000 on the position? Perhaps you never add to losing positions? But if you never add to losing position, you will lose many great prfitable trades as well. What is a good compromise? Or maybe there can not be any compromises in trading....and you should never add to losing positions...

Open to suggestions....
More...

I'm assuming you are a technical or chart based trader, not a value or fundamental player. The answer is simple--when you enter a trade you have something that will tell you objectively that the reason you entered is no longer valid. It can be a movememnt against you of x amount or percent, it can be a reversal of an indicator or the passage of a certain amount of time. The best way to double up is to do it just before you reach your uncle point. Then cut loose the whole deal at that point. You risk next to nothing on the add but, as you point out, it cna pay off big.
 
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