What to do when your trade goes against you?

January 15, 2014 at 2:19 am
Just like it happened to me today, sometimes you enter an order, it gets filled then goes a little bit against you and gets stuck in a range. What should you do?

After years of trial and error I finally convinced myself to take a loss and go home, so to speak. I know first hand that this is much easier said than done. But once the reason for your entering the trade is not there anymore you must get out.
Just think about it. The only way to win consistently in the long run is to have the odds in your favour. In order to get the odds in your favour you must use some kind of a system and must follow that system’s signals. Therefore, if your trading system gives you a signal to enter a trade, you should do so. But if the signal for entering this trade is no longer there you should exit that trade immediately.

Let’s see what happens when you keep your losing position in order to avoid taking a loss:

1. Often times you risk more than you should. Even though your original stop loss was not hit you should not risk that amount of money anymore. Yes, you were willing to risk that money because your system gave you a signal to enter the trade. But since the signal is no longer there what is the point in risking this money?
2. By holding a position that is not moving anywhere you tie up your trading funds. There is a good chance that another opportunity will come along and you won’t be able to take full advantage of it.
3. You distract your attention by watching this trade that goes nowhere.
4. Most of the time when you are holding a losing position and hoping for the better, you get anxious and that is never good for trading.
5. Deviating from your trading system is a sure way to a disaster. And by holding a position that is no longer supported by your trading system’s rules, is the same as deviating from the system.
If you follow my trades, you will see that I could have avoided taking a loss today. As I am writing this, the EURUSD price just dropped below my entry price. So, not only could I avoided taking a loss but I could also make a profit on this trade. Does it bother me? Not really.
You see, in order to avoid losing 60 pips today, I would have to risk 60 more pips. This would be OK if there was a reason for it. But since according to my trading rules there was no reason for it, holding this position any longer would be the same as tossing a coin. But as I explained in my previous posts, you can’t win by tossing a coin in a long run because there is a spread (or commissions in other types of trading).