I wanted to write one article about the most terrible mistakes that traders make. But, yesterday I decided to write one separate article for each mistake, because I thought it is better to describe each mistake in details in one article.
Yesterday, I talked about taking a risk in trading and the way you can increase the level of the risk you take. I recommend you to read that article, because it is not only about risking. It tells you how to grow your account:
What Is the Proper Risk Reward Ratio in Trading?
Averaging Down is one of the other terrible mistakes that traders make. Most of the traders wipe out their accounts through averaging down.
What Is Averaging Down?
Averaging down is adding to a losing position. You take a position, but it goes against you. So you take another position while the first position is still open, with this hope that the price turns around and the second position goes to profit and you close the fist position at breakeven. Sometimes the market is kind enough to do it for you, but sometimes it keeps on going against you. So you average down again and take another position while the first two positions are still open. You do this until you get margin call which means you can close your open positions, but you can not take any new positions anymore.
If the price keeps on going against you, then you will reach the stop out level, and the platform starts closing your losing positions. It starts from the biggest losing position, and closes the positions one by one. When this happens, usually your whole account will be wiped out.
Why Do Traders Average Down?
A professional trader never makes such a terrible mistake. It can happen to a professional trader that he takes a position that goes against him. However, there is always a reasonable stop loss there to protect his capital. He gets out with a small loss that can be easily recovered with the next winning position.
The traders who average down, are not professional and have not learned how to trade yet. They are afraid of losing, and want to be winners all the time. So they don’t set any stop loss, and they average down when the market goes against them. Sometimes they succeed to get out with profit, but if the price keeps on going against them just once, they will blow up the whole account. This is something that the traders who don’t set any stop loss experience at least a few times, before they give up on trading.
You should accept and admit that you can not open a live account and double it every month while you not only have not properly learned the technical aspect of the trading, but also you have not built your discipline and confidence, and you have not mastered your trading system yet. Opening a live account under such a condition is like going to casino with $5000 in your pocket, and being hopeful that you get out of the casino with $50,000.
So the conclusion is that averaging down comes from the lack of knowledge, experience, patience and discipline.
What Is Scaling Up?
Scaling up is adding to a winning position. You open a position and it makes money, so that you take another position while the first position is still open.
I have read it in some articles that they recommend the traders to scale up, but obviously those articles are not written by real traders.
You don’t have to scale up when your position goes to a reasonable profit. You can move the stop loss to breakeven and let your profit run. Scaling up is not a good strategy because you never know when the price turns around. It is possible that when you take one more position, then the price turn around suddenly and goes against you. Then you will have to get out with loss. So I don’t recommend you to scale up. I have never done it myself.
I am going to come to the same conclusion again, that in order to avoid these mistakes and losing money, you have to pass all of the learning stages carefully and patiently. This article can help: The Importance of Demo Trading and Your Demo Account