What is a Trading Plan?

How many times have you had a position to go against you? You planned the trade
correctly, but soon after you bought your initial position, you discovered that the price you
paid was higher than what it was now worth. The first trade was a loser compared to the
market price. What could you do with this losing trade? You could sell it out and look to buy
something else, or you could buy a few more shares or contracts at the new lower price.
Which is the better solution to your dilemma? In most cases, Most people, however, would
buy more at lower prices.

They would average their losses on the way down if they are buying, or average their losses
on the way up if they are shorting. There's an old saying that if it looked good at a higher
price, it looks a lot better at a bargain price. Traders determine whether they will average or
not by looking at what they are trading: stocks, options, or futures.

Let's look at each of these trading vehicles in terms of averaging losses. When dealing with
stocks, averaging losses at lower prices can often work, depending on the viability of the
company you are averaging your position in. This means that the company you are buying
mustn't go bankrupt or in any way destroy your ownership interest. If there is even a slight
chance that your stock will become worthless through bankruptcy, you will never get back
your investment. If another company buys or merges with your company, the acquiring
company either converts your ownership to a portion of the new company or pays you cash.

You will have to average your losses in the newly formed company or else you will be
cashed out and will realize a loss on your holdings in the original company. Investors who
average their losses will do whatever they can to avoid this. After incurring forced losses
due to mergers or buyouts, these investors will forsake their original plan to average their
losses and will take the tendered cash to buy stock in the new company or to invest in other
companies.

This approach can work at times, When they trade in commodities, most investors and
speculators rarely consider that they are playing these markets at a fraction of the total
value of the contracts. Unfortunately, when it's time to take delivery of these commodities,
most undercapitalized players, up against the trading giants, will not be able to ante up. In
each of the three cases, stocks, options, or futures, the initial consideration in averaging
losses was whether or not the total investment or speculation could disappear to zero value.

With stocks, this was possible only if the company went bankrupt. With options, you could
average your losses only. Even with the zero-value consideration in mind, it would be rather
risky. Though commodities always have intrinsic worth, it is extremely unlikely that the
traders who speculate and try to average their losses would have enough capital to take
physical delivery of the commodities at expiration. Few players have the capital strength to
take physical delivery of commodities. Those who do can make some interesting
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