Adding to Positions and How it Affects You

Adding positions to an open trade is an advanced trading technique that, although potentially risky if not done correctly, can magnify profits exponentially. But just like every other aspect of trading, this technique can have a strong psychological effect that may hinder your trading performance.

Adding to Losing Positions

Whether you’re “averaging down” on a long position or “averaging up” on a short position, adding to a losing position is a technique that we don’t normally recommend noobs take on or attempt, especially live, until they have their risk management discipline down cold.

Some may argue that adding to losing positions improves their average price when they enter a trade too early, which is a valid argument, but this action tends to bring in one of the most potentially dangerous mindsets to have when trading: hope. Hope tends to creep in and can be a negative influence on your decision making process when you don’t plan ahead, and this is especially true when adding to losing positions. Instead of taking a step back and reassessing the position objectively to find out why it’s a loser, traders may turn a blind eye to the current conditions and HOPE that the market will turn back in their favor once they’ve committed to getting bigger in the trade. Needless to say, doing this often and running into a string of stopped out trades can lead to huge losses when positions are arbitrarily stacked up.

“Hope” and “scaling into losing positions” can be a combo that’s very hazardous to your trading account, but you can avoid that pitfall by pre-planning your max risk, entry & exit levels, and position sizes–you know, stuff you’re supposed to do with every trade! :p If you’re unsure on how to do so, then be sure to check out our guidelines for adding to losing positions found here.

Adding to Winning Positions

Not only do successful traders let their winners run, but they maximize their potential profits by adding to their winning positions when the market environment calls for this technique to be employed (ie. Trending and/or momentum market movements). Maximizing potential profits is always “awesome,” but this trading technique can bring on its own psychological issues.

Now, if you follow our guidelines to scale into winning positions, then you basically know how to create trades with limited risk and high reward-to-risk potential. How can anyone have issues with that?

Well, if you add on more to your position and it goes against you, that profit could vanish faster than you made it. This is when one of the most difficult psychological issues, in my opinion, for noobs to get over kicks in: the fear of “turning winners into losers.”

The fear of loss can be very motivating: the fear of losing your job may motivate you to work harder; the fear of losing your hand will most likely cause you to not pet alligators or sharks; the fear of losing his lady love propels Cyclopip to shower at least once a week!

In trading, the fear of “a winning trade turning to a loser” is a powerful one which often causes noobs and experienced traders alike to cut out of a trade much too early and miss out on a really big profit. As difficult as trading is, we really can’t miss out on any of those.

Again, this mental block from holding onto winners is a very difficult one to get over, but not impossible. By practicing this technique many, many, many times through price action/system reviews, and applying it on demo, you’ll gain the experience and statistical support needed to give you confidence when executing on a live account. And it doesn’t hurt to think as my buddy Pipcrawler thinks when he says, “You gotta risk it to get the biscuit,” right?

So, stop wasting time and start practicing your scaling techniques to avoid emotional hang ups, and if you want some examples on how to properly manage you risk while adding to your position, you should check out the FX-men blogs as some have given a step-by-step guide on the best scenario possible for maximizing profits on certain trades. I hear that Pipcrawler, Cyclopip, and HappyPip were inspired by my entry on deliberate practice, so they have a bunch of good blog posts on past price action. Check’em out and then figure out how you could add to open positions in a way that works best for you…Good luck!

  • t4fast

    I disagree presenting the averaging down or up on losing trade technique as the most destructive trading method. It all boils down to proper money management. Two points to focus on while averaging on a losing trade: 1- what is the maximum loss you are planning for. 2- dividing the total possible loss on geometrically on number of trades.

  • t4fast

    I disagree presenting the averaging down or up on losing trade technique as the most destructive trading method. It all boils down to proper money management. Two points to focus on while averaging on a losing trade: 1- what is the maximum loss you are planning for. 2- dividing the total possible loss on geometrically on number of trades.

  • sunglow

    Mmmm. I am not so sure about this one. If you put on a trade and the market moves against you, there is a very big risk that you are just adding to your problems by increasing your position. By adding to your position, you are saying that you are right and the market is wrong. Thinking like that is dangerous. If you place a trade and the market moves against you, take your hit at your pre-planned stop loss limit and accept that you called it wrong and save that extra money for your next trade.

    There is much more sense to adding to winning positions. If there is strong market movement in one direction, why not add to your position? However, I have never done this and I think that I am going to take the advice of Forex Gump and try this on my dummy account before I try it live.

  • sunglow

    Mmmm. I am not so sure about this one. If you put on a trade and the market moves against you, there is a very big risk that you are just adding to your problems by increasing your position. By adding to your position, you are saying that you are right and the market is wrong. Thinking like that is dangerous. If you place a trade and the market moves against you, take your hit at your pre-planned stop loss limit and accept that you called it wrong and save that extra money for your next trade.

    There is much more sense to adding to winning positions. If there is strong market movement in one direction, why not add to your position? However, I have never done this and I think that I am going to take the advice of Forex Gump and try this on my dummy account before I try it live.

  • drpipslow

    @t4fast

    As you said, the key figure to keep in mind is the maximum loss that you are willing to take on the trade. Scaling into a position where price is moving against you can be viable strategy, AS LONG AS IT’S PART OF YOUR TRADING PLAN. One strategy that you could take is to enter at all Fib level (38.2%, 50.0%, 61.8%). Once again, we advise to practice this technique first before trying it out on a live account.

  • drpipslow

    @ sunglow

    Good idea to try it out on a dummy account first. No shame in practicing! All the greats have gone through it!

  • drpipslow

    @t4fast

    As you said, the key figure to keep in mind is the maximum loss that you are willing to take on the trade. Scaling into a position where price is moving against you can be viable strategy, AS LONG AS IT’S PART OF YOUR TRADING PLAN. One strategy that you could take is to enter at all Fib level (38.2%, 50.0%, 61.8%). Once again, we advise to practice this technique first before trying it out on a live account.

  • drpipslow

    @ sunglow

    Good idea to try it out on a dummy account first. No shame in practicing! All the greats have gone through it!

  • personalme

    Well, based on my journey so far, I may say dr pips was right. I put already my rule to not add a losing position instead just cut it out. Adding position in a profitable trade is another side of the coin. It takes time to figure out a good method, but yes, it works to me.

  • personalme

    Well, based on my journey so far, I may say dr pips was right. I put already my rule to not add a losing position instead just cut it out. Adding position in a profitable trade is another side of the coin. It takes time to figure out a good method, but yes, it works to me.