The method of defending the position - Money Management

Today's article will present the strategy of defending a loss-making position with the use of cyclical adding and retrieving capital to lower the entry price. We often keep our position at a loss and even though we see that the price can potentially turn back now and go "in our direction" - we do not increase the position, because we are afraid that the price will not reach the break even and we will be able to take out the averages there. For forex players using MetaTrader this may seem more intuitive, as each trade is displayed as a separate entry. For margin traders who operate on cryptocurrencies using popular exchanges, such as BitMEX or Deribit, it may seem less obvious. However, to get to the point. What is the strategy?

Assumption:

In trading, just like in strict disciplines, certain rules are right based on certain assumptions. This is no different for the capital management strategy described. So the assumptions are:

1) You are in a loss-making position, 2 The position was taken for less than half the deposit, 3 The price has not yet negated the scenario you are playing - there is a sense of averaging, You can afford a controlled insertion into position.

If all four of the above mentioned requirements are met, you can try to play the position as described in the following paragraph.

Way:

Clue of this method is to add to the position while being at a loss and then pull out a part of the position at a price that is profitable in relation to the averaging price, but not necessarily higher than the average entry price of the whole position. Usually we don't do this because taking out a part of the position at a loss relative to the entry price will result in a depletion of the deposit - the broker, e.g. BitMEX, books it as a loss and we don't want to lose! However, logically, if we add to a position and then reduce it at a better price than we added, we have made money (we have reduced the global loss on the position)! Realising this mechanism is the key to understanding this method. The easiest way to discuss this way of playing a position is through a case study.

Case study

Let's consider a position played on the XBTUSD pair on the BitMEX platform - we are opening a lounge for 1000 x50 contracts at 8170.

  • Trade direction - Long
  • Number of contracts - 1000
  • Lever - 50
  • Entry price - 8170
  • Entry Value: -12 240 000

Suppose the price drops to 8150. We buy another 1000 contracts:

  • Direction of transaction - Long
  • Number of contracts - 1000
  • Lever - 50
  • Entry price - 8120
  • Entry Value: -12 315 000

After this addition, our position is for 2000 contracts and the position balance is -24 555 000 XBt, averaged entry price 8145. The price went up to 8140, but it didn't go through, so we draw 1000 contracts at 8140:

  • Direction of transaction - Short
  • Number of contracts - 1000
  • Lever - 50
  • Entry price - 8140
  • Entry Value: 12 285 000

Our deposit will be slightly depleted (by 7500 XBt), currently the position is 1000 contracts and its status is 12 270 000, the entry price displayed by BitMEX is still 8145, but the actual output at 0 calculated according to the position status is 8150.

The price continues to decrease. We buy 1000 contracts at 8100.

  • Direction of transaction - Long
  • Number of contracts - 1000
  • Lever - 50
  • Entry price - 8100
  • Entry Value: -12 346 000

We have 2000 contracts in the game, positional status: -24 616 000 XBt, entry price according to BitMEX 8122.5, exit price "to zero" 8125.

We exit the whole position at 8130:

  • Direction of the transaction - Short
  • Number of contracts - 2000
  • Lever - 50
  • Entry price - 8130
  • Entry Value: 24 600 000

We make the difference between the Entry Value and the previous position, that is 16,000 XBt.

List

In the above considerations, commission fees were omitted.

Summary

The method presented above enables a more conscious playing of positions with an averaging. It also avoids the possibility of increasing the position "infinitely", which often leads to excessive overfload and high loss. As you can see from the example above, if we had waited for the price to reach the 8145 average - we wouldn't have seen it, and probably at 8100 we wouldn't have added up. In this case, we managed to break down the entry price a little, and except for the averaging, we were able to provide ourselves with the mental comfort of being in a smaller position and being able to do the re-insertion/retrieval operation. The way presented above is an interesting alternative to waiting "until it bounces" and gives you the opportunity to play the position further, even when our position is in the minus, additionally allows you to lower the real entry price and go out to the plus, in favourable conditions. However, it is important to remember that by using this method, the entry price shown by BitMEX is different from the real "exit price to zero" and that by closing a position at a loss - the deposit will melt. It is therefore worthwhile to calculate the actual "exit price to zero" on the way.

Share your opinions about this method of defending your position!

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