I've been always wondering how to cut losses, I know I should do what the market tells me to do, I'm not looking for that kind of answers. Here is the scenario: Assume I buy reversal according to oversold and a few other indicators (or other trading strategies), I had a good setup and entered a long position, but the price continued dropping and my loss had reached my maximum loss per trade, I should close my position according to my trading rules. But, on the other hand, it's more oversold and I have a even better setup, I should buy more instead of cutting losses. This is a dilemma. What do you do and why?
With the little amount of information you've given, I think you should stick to your rules and cut your losses...but learn as much as you can about reentering to catch that eventual reversal. Markets can decline far more than anticipated...you don't want big losses! Many will say your crazy for trying to pick a bottom...those traders will be the trend followers. It sounds like your best bet is to follow a good plan of cut your losses and maximize your gains...so, cut those losses! FYI...I don't trade like any of the above.
Ever hear company called Enron? Do you think each ten bucks down would be a better buy? Long term stocks I have backtested them 25 plus years, day trading 10 plus years, this is only confident way to know the answers you seek, not asking members. Stocks are not like the ES, they trend till they don't trend, when they go down, trend either neutral or down trend. But really has much to do with your back testing and Trading Plan. I will average down in overall stock position, but each stocks has different percentage down I will do and I use options to add to a position. In stocks I look at averaging down as defensive move unlike scalping ES. But I would recommend just take the loss and find something else. You can always hedge the Long Stock position and do Put Debit spread to help cover possible stock losses, if stock goes up, sell the long Put and keep the short put trying recover losses on long Put.
It's good that you set a max loss per trade. I would sell at my sell signal or stop loss and move on. No sense crying over it.... Just move on to the next trade. Just because something is oversold does not mean it will revert to the mean or reverse. If it's a strong down trend it can remain oversold for a long time. And if you think the market HAS to revert because it SOOOO OVERSOLD and it just CANT stay this oversold that long then that too is poor thought process. The markets can remain irrational a lot longer than you can remain solvent. Don't try to argue with the market or believe you can control the market or even understand the market. Just follow what it is telling you. No matter how irrational it may seem. I think it's good that you have determined a max amount of loss per trade but I can't say whether you have chosen an appropriate stop loss. You could have a stop $0.10 away and have 10,000 shares which represents a $1000 max loss or you could have a stop $1 away and have 1000 shares also representing $1000 loss. Your max loss (in this example $1000) may have been achieved with both trades but which if either had the better stop loss chosen??? I choose to use a multiple of ATR for my stop loss point but I am quick to re-enter a trade if my signal tell me to do so and choose a new stop based on the current ATR again. Which ATR (3 day, 7 day, 10 day, etc??) and what multiple of ATR (2x, 3x, 5x, etc?)for my stop loss you ask???? Well that is another $1 million question. Back testing and trial and error helps. My $.02
I should've asked what time frame you trade? Intraday, swing, or position? I actually average down with longer term positions.
Sorry, I'm talking about day trading. Before I started trading es last month (in pre-open hours), I use oversold/avg down strategy to trade stocks, which worked very well. But after I trade es, my stock trading started to lose. I think it's because I'm not that focused, often I have to lose before I earn with the avg down strategy, but I want to protect my es profit, I would hesitate when I should add more positions. It has become a pattern that I earn a good profit by trading es in pre-open hours, and then lose part, all or even more to stocks. Anyway, I've given up avg-down strategy with stock trading and always attach a tight trail stop order to my stock orders, but loss is loss, they add up quickly. I may give up trading stock before I come up with a winning strategy.
Well, the short answer is no knows the future -- it's entirely your call. Every trading decision is. Every trade has two battles: choosing the direction. and managing the trade in the heat of the battle. It's important to have macro viewpoint of the trade, and micro one as well.
Still learning. For me it's too expensive to try get a fill and then stop the loss very close below current bar (daily TF). Kind of looking at that kind of practice the same way as leverage: When overleveraged, you also tend to narrow your SL. This seemingly allow you to bet larger, which unfortauntely too often just end up costing you more, at a higher probability for loss. So the trick is to find where you should "give up". You can scale out on the way down. And don't bet too large. Gets more boring, but becoming profitable is more important than entertainment. Can always improve on something that works, later.
you cutting losses alright every one can cut loss the question is what to do next ... in situation you described efficient method should indicate not only where cut of the loss, but another reversal after you got stopped... and then , as the trend develops it should indicate where and how to jump from one time frame to another etc, etc overbought /oversold indicators are not imho effective for what i am talking about
If someone asked me this Id recomend to always avg in and avg out. Never go all in at one price entering and exiting. Its always better to buy a little, wait, buy some more and if it keeps dropping sell a bit, wait, and then sell a bit more of it keeps dropping. This strategy will prevent those times when you sell it all at the low because you got emotionally scared. Oftentime newer traders sell at the low or buy at the top so piecing into it will reveal those bad trades and allow you to still be in the trade even while making bad mistakes when exiting.