Here is another short post on something I feel strongly about. The reason I bring it up now is because I have had back-to-back discussions about the topic with one-on-one coaching students recently. Both of them asked, “If you have a losing trade but it looks like a good setup again, should you take it?”
Of course, when you word it this way, a good or even a great setup should always be considered. But I like to tell traders to think of the adjustment as a brand-new trade…because it is. You are most likely closing out a losing position and looking to enter another one. Fair enough. But if you look at the possible psychological aspect of closing out a losing position, there is a tendency to think of it as a “revenge” scenario. As in, “I am going to show that stock who is boss!” Clearly, not everyone will feel that way, but a pretty big majority do in my experience.
So, to avoid that drama, I like to say there are plenty of other fish in the sea, meaning other trade ideas are just waiting to be found. I also like to say that your P&L does not care how you try to make up the loss on that last position. Only you might. Just because Apple Inc. (AAPL) took your money does not mean Boeing Co. (BA) can’t make you enough to compensate for some if not all of that previous loss.
I like to tell traders, when in doubt, look elsewhere. There will not be as much of a psychological element involved with the trade, and I can almost guarantee the results will be better too.