Increasing a Losing Position

Increasing capital in a position when the market moves against you is no easy task. This strategy is not recommended for beginner traders. If your trade is losing, why double down and risk even greater losses? At first glance, this may seem illogical, right?

However, it's almost logical because if you can add to a losing position without exceeding your acceptable level of risk, it can be a wise decision. But to do so, certain key rules must be followed:

1. A stop-loss must be set, and you must stick to it.
2. Entry points should be determined before trading begins.
3. Position sizes must be calculated so that the overall risk remains within a comfortable level.

Let’s look at this with an example:

Imagine the currency pair dropped from 1.3200 and consolidated between 1.2900 and 1.3000 before further declining. When the pair hits the 1.2700-1.2800 range, it begins to move back toward the consolidation level. If you believe the market will return lower, but you're unsure of the exact level, you have several options for action:

1. Open a short position on the break of support at 1.2900. The issue is that if the pair moves upward, you’ll miss the potential profit.
2. Wait for it to reach the upper boundary of the consolidation at 1.3000, which could be a strong resistance level. However, if you're waiting for confirmation, you risk missing the drop if the market reverses earlier than expected.
3. Wait for testing of the resistance zone, then open a short to the 1.2900 level. This cautious option is based on the idea that control will shift to the sellers, but you may miss a good entry point.

So, what should you do in this case? How about opening positions at both 1.2900 and 1.3000? This is possible, especially if you’ve planned ahead and are following your trading plan.

1. Set the stop-loss: Let’s say you set the stop at 1.3100, which represents a level where the market signals a wrong move and an exit point.
2. Determine entry points: Your support/resistance levels are 1.2900 and 1.3000. Open positions at these levels.
3. Calculate position sizes: To stay within a comfortable risk level.

Let’s say your account balance is $5,000, and you want to risk 2%. This means your acceptable risk is $100 (2% of $5,000).

Calculation example:

1. Short 2,500 units of EUR/USD at 1.2900. The value of each point is $0.25, so a 200-point stop will result in a $50 loss (0.25 x 200).
2. Short 5,000 units of EUR/USD at 1.3000. The value of each point is $0.50, so a 100-point stop will result in a $50 loss (0.50 x 100).

In total, you’re risking $100 with your stop-loss.

Doesn’t seem too complicated, right? Even if the market goes higher, you can enter at 1.3000 and stay within your comfortable risk level.

When combining the trades, you’ll have a short position of 7,500 units of EUR/USD at an average price of 1.2966 and a stop-loss of 134 points.

If the market continues to fall, the profit/risk ratio of 1:1 ($100) will be achieved at the level of 1.2832 (the average entry price of 1.2966 minus 134 points of stop). Since the majority of the position is opened at the best price of 1.3000, the pair doesn’t need to fall too much to secure a good profit.

 

This approach helps you manage risks more flexibly while maximizing profit, without significantly increasing the overall risk in the trade.