Averaging down a losing position is a trader’s unwillingness to accept losses. His ego overrides his objective and ignores the risk exposure to his trades. He needs to prove that he is right that the market will be back in his favor and feel the urge to do something about it. Averaging down seems to be a logical action to take because the prices are much lower now looking like it’s a bargain.

Any experience trader will liquidated his position and get the hell out should it pass a certain price without further increasing his risk and that’s why stops are there for a reason. Mental stop doesn’t work. You cannot allow any emotional or psychological reason to influence your decision over your stops.

The reason that you must never average down a losing position is that no matter how many more contracts you add to it, the trade will still be negative simply because it was already in the wrong side of the flow order in the first place. Adding to a loser is increasing more risk and opening you to bigger losses.

To overcome this trading behavior, first you must accept that it is alright to have losing trades and that is part of your trading business. Next, to control your urge to do something to your losing trades is setting your stop loss order immediately after your trades have been executed and in no circumstances should you lower your stop. You can only move it higher to protect your capital after you have seen some substantial profits. Follow it and you will be on your way in becoming a better trader.

“If fear alters behavior, you’re already defeated” - Brenda Hammond

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