AVERAGING A LOSS

This mistake is usually a holdover from trading equities or futures. In Forex trading, with 100 to 1 or greater margin,averaging a loss can be disastrous to say the least. A typical approach is that once you have entered a long position in the market and it drops lower, you might figure that since it was a good buy then, it is a better buy now. You may justify averaging down by figuring you will have a lower average entry price and require a smaller move to break even.

Unfortunately, you will lose twice as much if the market continues against you, as it almost always does. There are approaches that allow you to buy a market at one price level, add to the position at a lower level and add on again at even a lower level, as long as this was your predetermined game plan before you entered the trade initially.

Personally, I never trade this way but it is some manager’s strategy. You must also have an unmovable protective stop loss order that takes you out of the entire position.This mistake is easily overcome by having a strict rule to never average a loss unless your predetermined plan calls for averaging the trade in the case the market moves against you. This can be done with a pending unmovable protective stop loss order to exit the entire position if it is hit.