The Temptation of Averaging Down on Losing CFD Positions
I wanted to share a lesson learned, or perhaps re-learned, from a few months back that hit me particularly hard. It involved a CFD position on a basket of European equities that were showing weakness. My initial entry was sound enough, based on some technical indicators and a broader market sentiment reading. However, the market kept grinding lower, and instead of accepting the initial stop loss, I started to average down.
The logic in my head was simple, almost persuasive: the market was oversold, a rebound was imminent, and by adding at lower prices, I'd significantly reduce my average entry cost. The problem, as it often is, was that "imminent" never arrived when I needed it to. I ended up building a much larger position than my risk management plan allowed, effectively doubling down on a losing bet. When the rebound finally did materialize, it was nowhere near enough to cover the accumulated losses from the earlier, larger entries. The initial manageable loss became substantial. It was a classic case of hoping the market would validate my bias rather than respecting its direction. Now, my rule is much stricter: once the initial stop is hit, that trade is over. No averaging down, no trying to catch a falling knife just to 'improve' the average. Better to cut ties and find a new, cleaner setup.