Should You Close or Counter a Losing Position?

Happy Friday!

This week’s question comes from Lateef, who asks:

I was told that when a trade is not going your way, you should counter-trade. Is it a better option to just closing a losing position?

Countering a position refers to changing the direction of a trade immediately following a loss. So if you get stopped out on a long EURUSD position, you would immediately sell the pair.

Like most things, the answer depends on several factors. The most important being your style of trading, tolerance for risk and even your personality.

As you may well know, your approach to the markets must fit who you are as a person. Because if you can’t relate to the approach, you won’t believe in it. And if you don’t believe in it, you will resist any rules you create for yourself.

But although countering losing trades is a personal decision, there are several factors you should consider before deciding.

Let’s get started.

For me, the most important price of the day is that which prints at 5 pm EST. Because I use New York close charts, this is when each session ends.

If you’ve ever watched a currency pair trading near a key level in the last hour of the session, you know how volatile the market can become.

There’s often a mad scramble between buyers and sellers just before the session close at 5 pm EST. The same thing happens in the U.S. equity markets; only it begins at 3 pm instead of 4 pm EST.

There’s even a name for this last hour of equity trading. It’s called the “power hour.” 

While we don’t have an official name for it in Forex (that I know of), the settlement period between 4 pm and 5 pm EST is just as significant and telling.

Why is this important when deciding if you should exit and counter the original trade?

It’s important because if you exit a position due to an intraday spike, the session could still close in favor of your original idea.

So if you exit and counter, not only are you losing on one position but you could also get yourself stuck on the wrong side of a market a second time.

With that out of the way, let’s run through a few questions you should ask yourself before deciding to counter a losing trade.

Before I even consider a trade setup I have a directional bias. It could be a long-term, intermediate or even a short-term bias, but I always have one.

To answer the question of whether you should just close a losing position or counter it, you first need to differentiate a negated setup from a change in bias.

For instance, just because a setup is negated does not mean an associated directional bias has also changed. While that could very well be the case, one does not always equal the other.

Take the EURUSD daily chart below as an example.

While the bearish pin bar was negated shortly after forming, the trend was still bearish. As such, it wouldn’t have changed my directional bias for the pair.

Here’s why…

Notice how the former swing high was never challenged. So even the short-term bearish trend is alive and well despite the failed bearish pin bar.

So before you decide to reverse your position, ask yourself if your bias has also changed.

If not, it might be wise to dismiss the idea altogether.

I’m a relatively discretionary trader these days. Years ago I had a ton of rules to follow for entering and exiting trades as well as what to do after wins and losses. And I teach those rules and methods to my students.

But as time passed I became more discretionary. I still have rules, but they’re much less restrictive than they used to be.

The single biggest contributor to this transition was learning how to control my emotions.

However, one rule has stood the test of time – my 24-hour rule.

It doesn’t matter if I lose just 0.25% of my account balance. It still counts as a loss and forces me to take a 24-hour hiatus from trading.

Why do I do this?

I do it because just like any human, I’m prone to making emotional decisions following the loss of money.

Every person has a competitive side. It’s human nature. Some of us are more competitive than others, but the market has a way of bringing out the demons in all of us, even those who claim to be less competitive.

By removing myself from the markets for 24 hours after a losing trade, I give myself time to settle down and recompose. This helps ensure that my next trade has technical merit and is not born of greed or revenge, both of which will get you in a heap of trouble.

Now, if you immediately counter a losing trade, how can you be sure that you’re not trading on emotion? How do you know you’re not just throwing money at the market in hopes of winning back what you just lost?

Neither answer is easy to discern.

You may think the technicals are backing your decision to reverse a position, but your subconscious could have other plans. Odds are it probably does.

For this reason, I don’t counter losing trades. If the market takes me out for a loss, so be it.

I would rather have the next 24 hours to clear my thoughts and have peace of mind to get ready for the next opportunity.

The alternative means taking on new risk at a time when I’m clearly not on my “A-game.”

Since I just gave you my reasons why I don’t like to counter losing positions, I thought it appropriate to mention the importance of individuality.

You see, what works for me may not work for you. We have different personalities and most likely have very different trading strategies and risk tolerances.

This is why it’s important to test various methods as you progress in your trading career. There is no one size fits all, and the concept of right versus wrong is never more subjective than it is in the world of trading.

There is no single market secret to discover, no single correct way to trade the markets. Those seeking the one true answer to the markets haven’t even gotten as far as asking the right question, let alone getting the right answer.

Jack Schwager – Author of Market Wizards

So be sure to test various styles and methods, including that of countering a losing trade.

Be extra careful if you decide to counter intraday moves (those that occur before 5 pm EST). If you do, you stand a greater chance of having the market snap back on you, causing two losses instead of just one.

Always consider your directional bias, both before and after a trade. Just because a trade idea is negated doesn’t necessarily mean market sentiment has reversed.

It can be extremely challenging to determine whether you’re making a sound decision or trading on emotions immediately following a loss. For this reason, I prefer to take a 24-hour hiatus. I use this period to settle any nerves and recompose myself for the next opportunity.

Test what works best for you. There is no one size fits all solution, so be sure to practice various methods and keep track of the pros and cons for each.

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.