Some traders, many of whom began their investment careers in the stock market, have a tendency to engage in a practise known as averaging, or scaling. When you average/scale, you buy more of a commodity or a stock as the price declines. In the stock market, this is not necessarily a dangerous practise, since you can theoretically own a stock for a lifetime or longer.
But in the commodity futures markets, where the life of a contract rarely exceeds 12 to 18 months, averaging is much more risky. In the futures market, you dont have a luxury of time. You cannot wait many months, or even years, for the price direction to turn in your favor. Of course you can ask your broker to roll over you contracts to another contract month, but surely this is not the way to go about the problem you have. Commission alone will eat you alive. Moreover, due to the high leverage involved in buying or selling futures contracts, an adverse move can easily jeopardize your equity.
To prevent a small loss from growing into a large loss, therefore, NEVER ADD to a losing position. Unless you have an excellent reason to think the market will change direction, you should cut your losses at the earliest possible moment. For instance – a buddy of mine – a bid time pro trader – has an ironclad trading rule: if his newly taken position doesnt turn profitable the third day since open, he is out no matter what. A he is doing fairly good.
Now the trading success, aka L.U.C.K., tends to run in cycles. There will be periods when you cant seem to make a mistake. And there will be periods when everything you do result in losses. When you feel yourself going into a losing period, it is better to step back from the market than to press your luck. Remember, market likes Lovers, not Fighters.
When you take a trading break, often it is best to disassociate yourself from the market altogether.I kid you not. A trading break helps you to take a detached view of the market, and tends to give you a fresh look at yourself and the way you want to trade for the next several weeks or months. When you take a trading break, often it is best to disassociate yourself from the market altogether. Go on vacation. Find back a runaway spouse. Write a book about how to make a fortune. Whatever. Meaning, GET AWAY COMPLETELY.
Pro floor traders frequently use this attitude following a string of losses. When they return, they are less apt to be thinking of recouping losses or proving themselves something. Many other traders, especially those pros who benefit from low discount commissions, have a rule that they never hold a position over the weekend. This permits them to get completely out of the market by each Friday pm and begin the week with a fresh start. Good sanity is everything.
Good trades.
Tom