3 "Death Trap" mistaks traders make(Part 3)

3. Buying to average out the losing position.
Yet another MISTAKE that novice traders make so frequently when a trade goes against them.

When the trade goes against them, they first make the mistake of converting from a trader to an investor in an attempt to avoid losses. But then the worst happens the price starts to fall further; the trader has now given up hope of the prices to return back up soon.

Then he gets an idea, what f I buy more stocks at lower levels?, he thinks. Buy doing so the average buying price of the stock would be lowered and when the stock reverses trend he would be able to move out of the stock making profits!

This is a gross mistake and a trader should NOT be doing this.
Firstly, we got to understand that we are traders and not fund managers! The job of averaging while the price is falling, is the job of a fund manager. A fund manager knows that he can pump in more and more money into a losing position because he has to hold his positions for months and years and the price will change course eventually sometime. As traders our objective is to get our money out in the risky position for as short a period of time as possible and move on to the next trade.

Secondly, as we discussed earlier, the markets move in 4 stages. And each of the stages can take its own time to end and breakout in the next stage. Firstly, we dont know where the fall is going to end and second, even if the fall stops, we dont know for how long the consolidation is going to remain.

Logic tells me this kind of investing is a dead investment for the trader, an investor can afford to hold for a very long time, but we are traders!

Best wishes...

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