Should I Re-Enter a Trade Right After a Loss?

The price hits your stop loss resulting in a losing trade, but then you see the price immediately start moving in your direction again. Do you take another trade? How we act in this situation is a significant determinant of our overall success. In this article, I’ll discuss when you should jump right back in, and when you shouldn’t. Including, whether you should jump back in after a winning trade.

Re-Entering a Trade Depends on Trend Strength

I am always looking to buy during pullbacks when the selling slows and the price starts to show initial signs of moving higher again. Similarly, I will also look to go short in strong downtrends after the price has rallied but the buying has slowed and the price starts to show initial signs of moving lower again.

The main element here is “strong trend.” Whether we are trading futures, forex or stocks, we get to choose which trends (and trending assets) we trade. Therefore, we should always be trying to find the strongest trends. This will give our trades the highest probability of success.

Re-entering trades also depends on whether a valid trade setup is present, see your trade setup guide, and conditions are right. Conditions you will trade in, and the trade triggers you will use are laid out in your trade setup guide that is part of the trading system.

Re-Entry When the Trend is Still Strong

Assuming we are only trading strong trends, then as long as the trend is still strong–even if we get stopped out on our first trade–we will want to re-enter if another valid entry signal develops. 

Some of our biggest trades will come on our second entry, or sometimes even our third. This is because the market often has a false move in the opposite direction before a big move in the trending direction. You may have a great trade setup where everything looks great. But instead of going in your direction it blips past your stop loss, resulting in a loss, and then runs in the direction you expected. If the trade was good before, it is often even better now. The price tried to move in the other direction and quickly reversed back in the expected (and strong trending) direction. Get back in!

As a side note, holding trades through a news event is a personal decision. There can often be big moves, and they can go for you or against you. If unsure, get out before the news!

Avoid Re-Entry In Weaker Trends or On Failed Transitions

If the price hits our stop loss, but the trend wasn’t a very strong to begin with, then the price hitting our stop loss was a good thing and alerts us that this is a not a good trend to trade. We don’t re-enter.

Also, we may sometimes take trades at transition points. Maybe there was weakness in an uptrend, but the price has stabilized and if it has a strong upside breakout the uptrend will re-emerge. In this case, we have an equal chance for a positive or negative scenario (but our reward-to-risk is favorable so we may opt to take the trade). If the negative scenario develops, we don’t re-enter after we are stopped out.

Avoid Re-Entry After Signs of Reversal

Trends that were once strong will also eventually weaken and reverse. Therefore, just because a trend was strong when we took a trade doesn’t mean it will stay that way. The future is always unknown. If we get stopped out in a trend that was once strong, and the price keeps moving against that trend, that may indicate a much deeper pullback is underway, or possibly a reversal. In this case, we don’t re-enter. Most of the time you will even see a break of support indicating the end of the trend.

Re-Entry After a Winning Trade

What if you just got out of a winning trade? Do you consider re-entering if another valid signal occurs? Assuming everything still looks good, yes! When an asset is in a strong trend, I may end up taking making many trades during that trend, locking in profits along the way.

Many new traders struggle with this. They think that since the price has already dropped or rallied so much, the trend can’t possibly continue. They often make the mistake of trying to anticipate the reversal instead of capitalizing on the trend that is right in front of them. Yes, all trends eventually reverse, but it is far worse to miss out on a profitable trade than it is to take a small loss. I expect to make at least twice as much on winners as I lose on my losers, so missing a winner hurts far more than taking a loss. As long as valid signals occur, and everything looks good, keep hammering those trades.

Summary

If there is still a strong trend and you are stopped out, but then another signal occurs right away, consider taking it. Especially if the move you were stopped out on is quickly reversed by a strong move back in the trending direction. The market doesn’t care that you lost. Sometimes we will end up in trades before the asset is ready to move, and we get stopped out. What matters is recognizing that it is still a good trade and capitalizing if another opportunity materializes.

If the trend wasn’t that strong in the first place, it is probably best you got stopped out. Look for better opportunities.

If the price moves through your stop loss quickly and doesn’t move back in the trending direction, there is no new trade signal and we don’t re-enter a trade. Maybe down the road another opportunity will materialize, but until another valid trade trigger occurs, we stay out.

If we have a winning trade, we keep pounding the valid signals in that strong trend. The strongest assets rise (or fall) way more than most people ever expect. As long as the trend is strong, and there are valid signals, keep taking trades.

Live trade taken in the Live trading room on June 25 2020:

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Hope this helps,

Alexander Soares


Also published on Medium.