Adding To Losers, Mean Reversion, and Day Trading

[Predictor 11]

Many successful day traders come to the conclusion that adding to positions underwater doesn't work well. In fact, it has long been my preference that I only add to profitable positions. I recently revised this guideline to "I only add when more confident" and can add when above or under water. Yet, it seems counter intuitive that improving entry cost wouldn't work well because most day traders only make a few ticks profit per trade. It begs the question thus: why do most successful day traders find that it doesn't work well?

 

First, most day traders are highly leveraged and thus they can't withstand much of an adverse movement against their position. Adding extra size just makes the movement that one can withstand that much less. The second reason is that the time required for a position to mean revert is often longer then a day session. It is thus that day traders are double disadvantaged to attempt this trading style.

 

However, there are some large futures speculators who trade in just this manner. At any rate, the important factor to consider before adding to a loser is whether or not the trade is likely to work out within your time and risk horizons. The answer for many day traders won't be favorable but other traders with different time and risk horizons may find such techniques work better.

---

http://orderflowdashpro.com

Edited February 13, 2013 by Predictor