Trading Out Of A Losing Position (Part II)
The other great aspect of cutting part of your position is that you instantly take some of the stress away. One of the most stressful aspects of trading is the psychological impact a running loss may have on your trading. Faced with a big loss, most traders are keen to take a needless hit and stop the pain immediately.
Let’s take a run away trade example. Suppose you trade EUR/USD pair and is quite conversant with its behavior. Suppose you believe that the currency pair EUR/USD is overbought and is near the top. You believe the rate may fail near the resistance level 1.2453. You take an initial short at 1.2433.
Your plan is to scale into the position. This is your first shot. You want to stay flexible. You are looking for a swing trade back to the support level 1.1983. This will give you a 450 pip profit when you close your position on reaching this support level.
You expect that the maximum the rate would go is up to 1.2583. You place a 150 pips stop loss at 1.2583. This gives you a risk/reward ratio of 150/450=1/3. This risk/reward ratio is really good.
On reaching 1.2453 resistance level; EUR/USD pair rallies taking out stops to print a new high of 1.2490. You are not surprised. You knew it could happen so you had placed your initial stop loss at 150 pips.
You take advantage of the higher levels to place your second short at 1.2493. Now you are two short at an average cost of 1.2493+1.2433= 1.2463. You replace the stop loss of 150 pips with two stop losses of 75 pips each (150/2).
All the time you are expecting the trend to reverse itself. You plan to place a third short when it reaches the level 1.2383 (70 pips below the initial resistance level of 1.2453) since that will be an indication that the momentum is picking up steam to the downside. The EUR/USD pair begins to sink. You are happy.
The EUR/USD pair does not break that level. It rebounds at 1.2463 and is soon testing the highs again. You are unfortunate again. During this rebound you can choose either to cut the trade at cost or stick with it. You could have closed your position at 1.2463 taking a loss of 30 pips on your first short and a profit of 30 pips on the second short to end up with a zero loss. Learn swing trading. Get good forex training. Dicover a revolutionary new forex robot.
The rebound does not take place and the rate continues to go up and reaches the 1.2470. You did not close your positions instead you had decided to let the rate go up with a belief that the pair will rebound after going beyond 1.2500 level.
You decide to throw all your cards by going short again at 1.2473 as still you are expecting a rebound around 1.2503. Now you are short 3 lots average 1.2503+1.2493+1.2433= 1.2466.
