Addicted to Average Down?
- Thread starter Pension_Admin
- Start date
The question I have now is, how did LTCM got to be so big as to control too much of the market? With their experience and their intelligence, did they not know or heard about the liquidity issue?
What I believe is that LTCM had something that worked. It was backed up by research and further backed up by performance. They think they figured out the market, got overconfident, and that is when they got hit. They didn't want to take the hit, because they "know" prices will converge, so they average down more. They are well aware of the liquidity issue, but they are also desperate to save their fund and their reputations. So, they keep averaging down until they couldn't average down no more.
Contrarian or momentum, there is really no certainty in the market. It's all an illusion.
PA
Sorry, it's not illusion. It's deception.
PA
My goal of starting this thread was to get people away from averaging down.
It seem that now people are more interested in it and are confirming that average down is fine.
I have failed.
No more posting for me in this thread.
PA
It seem that now people are more interested in it and are confirming that average down is fine.
I have failed.
No more posting for me in this thread.
PA
I don't know the details of LTCM, but I'm aware that they were massively leveraged via derivatives and anything that spooked the markets placed them at enormous risk. I believe they were controlling over a trillion with 4 billion. Interesting that a "hedge" fund had no hedge for this contingency, likely because huge success in a strategy makes one complacent; I'm sure they thought the "impossible" would never happen, until it did.
This is the danger with an averaging down strategy in the wrong hands or when overleveraged. I knew someone who made millions in the 80's day trading and swing trading on margin with no stops, because what he did always worked. He either made money on trades or averaged positions until they became profitable. He used leverage as an edge because in a massive bull run you can get away with that. (When I started trading for the first time we were in a bull run off Jan 2008 lows and I was a 100% winning swing trader; I just held the losers or averaged down until they became profitable a few days or a couple weeks later at the most.)
Well this guy was on vacation in October 1987, leveraged to the hilt with no stops in place and he lost ABSOLUTELY everything he owned.
PA,
I think we need to define what averaging down is.
As you can see from some of the posts here we all got different definitions but the one thing we all agree with is increasing position size as the trade moves against you.
Some use max risk, some used fixed size, some increase size units, many definitions out there, some are powerful some are a time bomb.
No Heat
Agreed ... it's important to recognize various degrees of the term "averaging down". For example, while I would never average down indescriminately, I've found a strategy for YM that allows 2 entries, with a hard stop for both. Without the allowance for entries at 2 different levels, overall the system would not be profitable.
One question I have for Christianhgross, if I may ... is your net $ profit greater on single entry trades (smaller position size) or the trades where you've averaged in 2-3 or more times? On those where you're several tiers in, how does the net $ amount of where you take profit differ from the target $ amount on your single-entry trades? (ok, I guess that was 2 questions ....
)Yes I did let it run to be a momentum trade. And here is where discretion comes into play. Contrarians do expect their trades to become momentum plays. However, they will exit once they made their money. I tend to leave quite a bit of money on the table.
The general rule as it was taught to me is 50%, and 100%. However, due to the nature of the pullback I decided to let the stocks run. With respect to Ford it was an exception to the rule. I looked at their fundamentals and decided to let things go. But at 9.97 I pulled the trigger and closed my entire position.
Granted I left money on the table, but I thought 5x return is fine for me.
Another case of where I pulled the trigger and was thankful was GT (Goodyear). My average in price was 5.15, and when the stock reached the upper 15's I pulled the entire position. Sure GT went higher to slightly higher than 19, but now its trading at 13 and change. Again 3x my initial investment was good enough for me.
I think you can see the pattern, I buy very cheap stocks, keep them, and then dump them only to see them go higher. Though I lock in my profits, and take profits as I go along.