Adding to a losing position..right or wrong?

inandlong · Dec 17, 2002

That makes four axioms for the record:

1 - You will lose

2 - You will leave money on the table every trade

3 - Cut your losses quickly

4 - Do not average down

As far as number 4 goes, if you are averaging down, this is widely regarded as a bad idea. However, if your trade involves scaling in then it is a pre-determined strategy with a pre-determined stoploss and does not qualify as averaging down. Averaging down is a reflexive decision, not a planned one.

marketsurfer · Dec 17, 2002

Quote from inandlong:

That makes four axioms for the record:

1 - You will lose

2 - You will leave money on the table every trade

3 - Cut your losses quickly

4 - Do not average down

As far as number 4 goes, if you are averaging down, this is widely regarded as a bad idea. However, if your trade involves scaling in then it is a pre-determined strategy with a pre-determined stoploss and does not qualify as averaging down. Averaging down is a reflexive decision, not a planned one.

very very true, long. great post !

Avalanche · Dec 17, 2002

Not really a trader but Bill Miller the guy that I guess is setting a new record by being the only mutual fund manager to ever beat the S&P for 11 or 12 years in a row, averages down MASSIVELY....time and time again.

I know this year for instance he was supposedly buying all the nextel his fund could up to the limit when 3-4 bucks a share.

If he beats the s&p this year a lot of it be because he continued to average losers....because he was way way... early on some of the telecom positions he got into last spring.

Breakout · Dec 17, 2002

Quote from inandlong:

As far as number 4 goes, if you are averaging down, this is widely regarded as a bad idea. However, if your trade involves scaling in then it is a pre-determined strategy with a pre-determined stoploss and does not qualify as averaging down. Averaging down is a reflexive decision, not a planned one.

Good point...there are strategies that appear to be averaging, but really aren't because, like you said, there is a pre-determined stop loss in the strategy. Whereas, in averaging down
or adding to a losing position, a trader is hoping to recover a loss.

Bravewave · Dec 17, 2002

My two cents...never average down....don't add to losing positions....sure, you miss some opportunities, but better to honor your original stop loss points, exit the trade completely, then reload on a rational pullback. Risk management is the key to profits!

David

elindydotcom · Dec 17, 2002

Ok - so you're staking XXX (BigCO) and you feel sure it's going to move. But, you're not sure whether it's going to retrace before the move or if it's just going to go. So, since you usually risk 2% per trade, you decide to risk 1% now (which, if it goes, would give you an adequate reward anyway)and, then, if it retraces, add the other 1% to bring your total risk up to 2%.

Is this an acceptable strategy since you're adding to a losing position?

-eLindy

qdz · Dec 17, 2002

Wrong, psychologically. That is greedy. How can you want to gain double when you actually are losing? If your decision to add is right, your original position will recover the loss. If you are further wrong, you double the loss. What do you want to choose? I guess we'd better not be greedy. You may focus on consider ing whether to cut loss or keep the original position. But definitely not to add to a losing position.

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My loss, my experiences, my pain, and my lessons are Our rewards.

Breakout · Dec 17, 2002

Quote from elindydotcom:

Ok - so you're staking XXX (BigCO) and you feel sure it's going to move. But, you're not sure whether it's going to retrace before the move or if it's just going to go. So, since you usually risk 2% per trade, you decide to risk 1% now (which, if it goes, would give you an adequate reward anyway)and, then, if it retraces, add the other 1% to bring your total risk up to 2%.

Is this an acceptable strategy since you're adding to a losing position?

-eLindy

Yes, as long as you get out when you've reached that xxx
amount of dollars you're risking, and don't keep adding on thinking that "it must go my way eventually".

The difference in your scenerio and the 5 traders the starter of
this thread mentioned, is you have a pre-determined stop and they are "HOPING the market will go their way, eventually. That's what it sounded like to me.

In your scenerio, your "strategy" is to add-on. So, you're not
really adding to a losing position. When you've lost more than
your "initial risk" and you continue to add on, then you're adding
to a losing position.

qdz · Dec 17, 2002

I'd also like to point out if adding to losing is part of your strategy. Say you are a 10-lot trader and your plan is to buy 5 2-lot at different prices, then it is not called adding to losing position. But when you have 10 lots in hand and want to add more, it is adding up now.

Quote from qdz:

Wrong, psychologically. That is greedy. ...\

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My loss, my experiences, my pain, and my lessons are Our rewards.

PuffyGums · Dec 17, 2002

Ask for details. What some futures traders do is something that appears to be averaging down, but isn't. Suppose they are trying to enter long at a turn. They want a good average price, but know they can't really predict the exact inflection point of the bottom. So they'll just bid the bid when the market enters the lower half of the range which appears to be forming the bottom. Occasionally they'll snag a contract. They'll buy a little on the way down and some more on the way up, of course all done at the bid. Its just SOP for professional floor traders.

Note, they do this on turns, where there is good reason to think the market is bottoming. Do this in a down trend and you'll be in pain.