This is a guest post by Ahmad Hassam
You need to learn how to effectively trade out of a losing position into profit as a trader. If you apply proper money management, this situation might not arise. But suppose, you made an error of judgment and all of a sudden find yourself in a runaway trade that has the potential of blowing your account.
This situation can easily arise when you are using a mental stop instead of a real stop loss. This is what many pro traders do. They instead of using a real stop use a mental stop that they use to get out of the market. But pro traders also do another thing. Instead of getting out of the market, they prefer to slowly trade their way out of a losing trade.
So, when you find yourself in a losing position, three options are open to you. One is to cut your losses and immediately get out of the market. The second is to try average down with the hope that the market will turn around. Both these options entail taking a substantial loss. But the third option is to trade your way out of the losing position into profit. We will discuss the third options in this article and learn how to do it and end up in profit.
The most important part of this trading strategy is flexibility. In fact, whatever trading strategy you use, it should have an element of flexibility built into it. You need to learn how to scale with the market. Suppose, you are trading EURUSD and you think that it will top at the resistance of 1.3345 and after that start falling all the way back to support level of 1.282 in the next few weeks. This means a take profit of 525 pips if everything goes your way.
You think that it is a good swing trading opportunity that you can use to make 400 pips in next few weeks. Remember, some months back EURUSD was showing a lot of volatility, you can relate it with that. Now, you want to remain flexible. You decide to use a stop loss of 175 pips in case the EURUSD pair overshoots. This means in case the pair overshoots, you will get out at 1.3420. So, you are ready to take this trade with a risk of 175 pips and a reward of 525 pips giving you an excellent Risk to Reward Ratio of 1:3.
You plan to scale into your position gradually as the market moves. This way you can stay flexible and move with market. So, you enter the market at 1.3335 by going short on EURUSD. The market moves up, reaches 1.3345, breaks this resistance level and reaches the top at 1.3395. You are not surprised. This is what markets do. The market is going to do what it wants to do proving you wrong most of the time. So, you short another lot at 1.3385. Now, you have two lots short with an average of 1.3360 (=1.3335+1.3385). Your stop loss now is just 87 pips away (175 divided by 2 as you are trading 2 lots).