Most professional traders will tell you that financial spread trading or, in fact, any kind of trading the markets is completely different to any other business. Although this is basically true, if you look a little closer you can find some similarities to trading and a traditional business.
For example, let’s take a traditional retail business such as a clothing store. The owner stocks the men’s suits in three colours – grey, blue and brown. The grey suits are quickly sold out, the blue suits are half sold and the brown suits have not sold at all. What should he do?
Does he go to his buyer and say “The grey suits are all sold out. Nobody seems to want the brown suits but I still think they are good and anyway, brown is my favourite colour, so let’s buy some more brown suits anyway”?
No, of course not.
The clever shopkeeper who survives in the retail business eyes this predicament objectively and says, “I’ve made a mistake. I’d better get rid of the brown suits. I’ll mark them down 15%. Let’s have a sale. And if they don’t go at that price I’ll mark them down to 20%, then 25%. i.e. cutting his losses I’ll get my money out of the brown suits and invest it into the fast moving grey suits that are in demand i.e. adding to a winning position”
The above scenario is common sense in a retail business. The same principle can be applied to financial spread trading.