If you plan to add "addition" to your foreign exchange trading skills, you should at least be aware that adding positions for profit and loss transactions may have an impact on your trading psychology.
Adding positions to open foreign exchange transactions is an advanced trading technique that, while potentially risky if done incorrectly, can also multiply profits.
But like other aspects of trading, this technique can have strong psychological effects that can hinder your trading performance.
Adding to losing trades
Whether you spread low against long positions or spread high against short positions, we generally do not recommend that novices adopt or try this practice, especially until their risk management discipline is established.
Some might argue that adding to losing positions improves the average price when they enter prematurely. It's a valid argument, but this behavior often brings forth one of the most potentially dangerous states of mind in trading: hope.
When you don't plan ahead, hope often creeps in and can negatively impact your decision-making process, especially when you add to losing positions.
Instead of taking a step back and objectively reassessing positions to figure out why trades were losing money, traders may turn a blind eye to the current situation, hoping that once they increase the size of their trades, the market will move back in their favor.
Needless to say, if this is done frequently, and you run into consecutive stop-loss trades, it can result in huge losses when positions are piled up arbitrarily.
The combination of "hoping" and "adding to losing trades" can be very dangerous for your trading account, but you can avoid this trap by pre-determining your maximum risk, entry and exit levels, and position size - You know, in every transaction, you should do this! If you're not sure how to do this, then be sure to check out our guide on adding to losing positions.
Increase positions on profitable trades
Successful traders not only let winning trades run, but when market conditions dictate the use of this technique (trend and momentum market movements), they maximize potential profits by adding to winning trades.
It's always "great" to maximize profit potential, but this trading technique can also create psychological problems.
Now, if you follow our guidelines and add to winning trades, you basically know how to create trades with limited risk and high risk-reward potential. How could anyone dispute this?
Well, if you add to a position and the trade goes against you, the profits can disappear faster than you can realize them. In my opinion, this is one of the most difficult psychological problems for beginners to overcome: the fear of "turning a winning trade into a losing trade".
Fear of loss can motivate you: The fear of losing your job can motivate you to work harder; the fear of losing your hand can keep you from keeping an alligator or shark as a pet; Take a shower at least once!
In trading, the fear of "turning a winning trade into a losing trade" is so powerful that it often causes both novice and experienced traders to exit a trade prematurely, missing out on really big profits. As difficult as it is to trade, we really can't miss a single opportunity.
Again, this psychological barrier that prevents you from holding on to winning trades is difficult to overcome, but not impossible.
By practicing this technique multiple times in price action/system reviews and applying it to demo trading, you will gain the experience and statistical support to gain confidence when executing trades on a live account.
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