When it comes to trading tactics, there are only two moves you can make. You can stick to the single entry/single exit strategy, or you can do multiple entries into a position until you get a better blended price that helps you turn a profit. I like to call that method, “spray and pray”.
Price action, by its very essence, is probabilistic. It never follows a clear and steady path. That’s why the multiple entry method is so compelling; in theory, it is exactly how you should respond to probabilistic opportunities.
You can never know the absolute bottom or absolute top of a move, so it’s better to spread your bets, and cast your net wide so as to increase the chance of catching the right price for the turn.
As seductive and as rational as that sounds, the multiple entry tactic is a gateway to trading hell…not because of the math involved, but because of the ever-present psychology of the trader. Whether you like it or not, the more you allocate to a position, the more attached to it you become.
It doesn’t matter whether you are a seasoned hedge fund manager or a rookie trader; we are all subject to the sunk cost bias. Sunk cost bias is simply the impulse to avert recognizing losses. It is perhaps the strongest human behavior pattern in behavioral economics, and is primary reason why all classical economic models fail so miserably at predicting outcomes.
This week brings the news of Crispin Odey, one of the more colorful and well known UK hedge fund managers who, in the past few months, lost a decade’s worth of profits betting against the Australian dollar. This unfortunate turn of events is a prime example of sunk cost bias; and, unfortunately, Mr. Odey has become the newest poster boy for the “spray and pray” disaster.
Multiple entry tactic is a perfectly valid way to trade. If you are a fully programmatic trader, it may even be superior to the single entry/single exit approach, because of the probabilistic nature of the markets. But if you are trading on a discretionary basis, you simply cannot use that method…no matter how many times you tell yourself that you have it under control.
There will come a point when you will pull a stop, and the multiple entry strategy will turn into yet another massive average down pile of losses that will inevitably end in a margin call. This will always happen. Believe me. That’s the single, biggest reason to never use “spray and pray”; using this tactic will put you in the position of inadvertently turning the gun on yourself.
It’s true, that sticking to the single entry/single exit approach can be extremely frustrating, especially when you see that trades that were stopped out, could have been “repaired”. But in the long run, this is the only way to preserve your wealth and your mental health as well.
Until next time,
Mr. Schlossberg is the managing partner at BKForex and creator of the new course The ULTIMATE Forex Trading Course produced in conjunction with Weiss Educational Services. He is also a weekly contributor to CNBC’s Squawk Box and a regular commentator for CNBC Asia and CNBC Europe. His daily currency research is quoted by Reuters, Dow Jones, Bloomberg and Agence France Presse newswires and appears in numerous business publications and newspapers worldwide. Mr. Schlossberg has written articles on trading for SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is the author of Technical Analysis of the Currency Market and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game, both of which are published by Wiley. Boris’ extensive experience in trading and developing momentum based techniques provide the foundation for BKForex strategies.