Trading Rule # 7 & 8

Trading Rule # 7: Always Average Up and Be Truthful about your losses

It has been observed by experts that mostly people average down when they are incurring losses, fearing that keeping more quantity will put them in more vulnerable situation. Whereas, professionals average up, never down. They got to be professional in the first place because they added to their winners, not their losers. For one, you shouldn’t even be in a situation where you start thinking about averaging down. You should have exited the trade before it got to the point where averaging down became tempting.

In fact, this rule is as old as trading itself. Dickson G. Watts, who was President of the New York Cotton Exchange, wrote about it as early as the 1880s, in the book Speculation as a Fine Art and Thought on Life:
“It is better to ‘average up’ than to ‘average down’. This opinion is contrary to the one commonly held and acted upon; it being the practice to buy, and on a decline to buy more. This reduces the average. Probably four times out of five this method will result in striking a reaction in the market that will prevent loss, but the fifth time, meeting with a permanently declining market, the operator loses his head and closes out, making a heavy loss – a loss so great as to bring complete demoralization, often ruin.”

Then too, you will often hear traders boasting about their winning trades. In contrast, seldom will you hear traders admit about their losing trades. Here one thing you should promise to yourself about the trading is that never ever delude yourself by boasting about your winning trades; instead be honest to yourself about your losing trades. Please make it a habit not to lie about your trading loses. By facing the truth when you do make losses, at least you won’t be tempted to average down again.

Why should one never average down? Mathematically, it would take too long to explain – as experts say. It’s sufficient to know that that’s how real life trading works. Almost all hugh bankruptcies in trading companies worldwide happened because the traders involved doubled up losing positions with excessive leverage or lied about the losses to themselves and to their bosses. Hoping to recover losses by averaging down through additional leverage hardly ever works unless someone is really very lucky.

Trading Rule # 8:  Maintain Consistency

Successful traders find a formula and stick to it. Experts suggest a trader, particularly a novice trader, should adhere to one or two carefully selected trading patterns that work best for him/her. The need for a plan, a strategy and applying it in a consistent, methodical manner cannot be overemphasized.

When it comes to trading, rules are not made to be broken unless you want to end up broke. More importantly, rules exist to protect us from ourselves. Take the example of a few simple traffic rules, namely driving after consuming alcoholic drinks. Now consider breaking the three rules by speeding on the right side of the road after couple of alcoholic drinks; what do you think will happen? Do you think that the only risk is that the traffic police will catch you and fine you? Actually, you are likely to be added to the list of road accident victims. The same goes for a trader; should you choose to speculate in an inconsistent fashion, trust me, the financial results might well be similar to your trading account.

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