How To Turn A Bad Trade Into A Winner?

You need to learn how to effectively trade out of a losing position into profit as a trader.  You need to learn how to turn a bad trade into a winner if you want to become a pro trader. If you apply proper money management, this situation might not arise. But suppose, you made an error of judgment and all of a sudden find yourself in a runaway trade that has the potential of blowing your account.

This situation can easily arise when you are using a mental stop instead of a real stop loss. This is what many pro traders do. They instead of using a real stop use a mental stop that they use to get out of the market. But pro traders also do another thing. Instead of getting out of the market, they prefer to slowly trade their way out of a losing trade. Learn to keep your strategy flexible and adapt it to the market instead of trying to adapt the market to your trading strategy. So, when you find yourself in a losing position, three options are open to you.

1.One is to cut your losses and immediately get out of the market.

2. The second is to try average down with the hope that the market will turn around. Both these options entail taking a substantial loss.

3. But the third option is to trade your way out of the losing position into profit. We will discuss the third options in this article and learn how to do it and end up in profit.

The most important part of this trading strategy is flexibility. Infact, whatever trading strategy you use, it should have an element of flexibility built into it. You need to learn how to scale with the market. Suppose, you are trading EURUSD and you think that it will top at the resistance of 1.3345 and after that start falling all the way back to support level of 1.282 in the next few weeks. This means a take profit of 525 pips if everything goes your way.

You think that it is a good swing trading opportunity that you can use to make 400 pips in next few weeks. Remember, some months back EURUSD was showing a lot of volatility, you can relate it with that. Now, you want to remain flexible. You decide to use a stop loss of 175 pips in case the EURUSD pair overshoots. This means in case the pair overshoots, you will get out at 1.3420. So, you are ready to take this trade with a risk of 175 pips and a reward of 525 pips giving you an excellent Risk to Reward Ratio of 1:3.

You plan to scale into your position gradually as the market moves. This way you can stay flexible and move with market. So, you enter the market at 1.3335 by going short on EURUSD. The market moves up, reaches 1.3345, breaks this resistance level and reaches the top at 1.3395. You are not surprised. This is what markets do. The market is going to do what it wants to do proving you wrong most of the time. So, you short another lot at 1.3385. Now, you have two lots short with an average of  1.3360 (=1.3335+1.3385). Your stop loss now is just 87 pips away (175 divided by 2 as you are trading 2 lots).

The EURUSD pair starts to fall. You are happy, you plan to add the third lot at 1.3000. If the pair reaches this level, it means that the momentum is there for it to fall more. The pair falls, never reaches this level rebounds and makes a new high at 1.3420.

You are now stuck with a bad position. But you are confident about your technical and fundamental analysis and are sure that the EURUSD pair will eventually fall down to around 1.282 support level. So, you short another lot at 1.3410. Now, you are short 3 lots with an average cost of  1.3376 (=1.3335+1.3385+1.3410). Your stop loss is now 58 pips away (175 divided by 3) at 1.3434.

You at this point decide to disregard money management and remove all stops. After all EURUSD was supposed to tank. It has already become so overbought that it has to correct. You are short at an average cost of 1.3376 while the market is at 1.3405. You remove the stops.

But, EURUSD doesn’t tank. It makes a huge rally and reaches 1.3529 level giving you a loss of 459 pips (153X3=459). You are devastated. It looks like you are about to get a major hit with a large drawdown to your account.

But you are a shrewd trader. You get over the initial shock of market proving you wrong and the EURUSD pair refusing to go down to the level that you had wanted when entering into the trade. It is now clear, EURUSD is not willing to go down. Rather it will stay high at the levels that it has reached.

Now, you are a shrewd trader who knows that the market never moves up in a straight line. It makes a move, then consolidates, then moves again. So, these periods of consolidation is your chance to trade your way out of this bad situation into profits.

Soon, the EURUSD pair takes a dip and falls to the 1.3480 level. You get rid of the first lot at this level with a loss of 145 pips. Now, you are short 2 lots with average cost of 1.3397 with an unrealized loss of 83 pips.

Soon a range develops in the market that is 100 pips wide. EURUSD pair starts trading between the support of 1.3380 and the resistance of 1.3480. The market stays in this consolidation phase for 7-8 days. You actively start trading that range. Enter at the support and get out at the resistance with the third lot that you had freed up at the first go.

Every time you make around 100 pips. With just 2 trades, you make 200 pips recovering your initial loss of 145 pips and reducing the unrealized loss to just 28 pips. You make the third trade and now you are in a profit of 72. It is up to you now, when to get out of the market. But if you do another range trade,  you make a total profit of 172 pips. So, you do it again and you are 272 pips in profit. You can now decide to close all your positions with a profit of 272 pips or continue to range trade as long as the range is in place.

By having a flexible trading strategy that combined swing trading with range trading, you got out of a very bad trade that could have wiped out your account. The lesson learnt is never lose patience when trading and always stay flexible and move with the market. You can practice this strategy on your demo account. Good Luck!