Average down disaster

[Enter Wisely]

I've tried all kinds of position management strategies, including averaging down, averaging up, scaling in, etc.

Averaging down should be synonym with idiocy so I won't even discuss that.

Now, in my experience adding to winners is dangerous business because unless you caught up a very strong trend your adds are very much unprotected.

It's just better to just go all in from the beginning.

The tough part is the stop placement.

If you use tight stops or not that's a completely different topic quite a loaded one too but if you do, you must have a re-entry plan, it's only logical.

If you use small stops you can die the death of a thousands stops which is equivalent to a big stop, and big stops hurt so what do we do?

We adjust size based on risk.

In my experience every situation deserves a different stop and stop placement and size should be different for every setup and that's where you. the trader, come in and determine what size you should use based on the stop required to make sure max risk is in check at all times.

 

[sc85]

Today I shorted WFMI on the way its going up cause I thought it is overbought. Just got burnt Thanks God I didn't average it down...

 

[HSC.1775]

You have all read too many books and have too little real trading experience.

 

[Wittgenstein]

Quote from Redneck trader:

IMHO & FWIW

My Rules

1.) I will never average down - why add to a loosing position

2.) On a long - I always want to add to it by paying higher prices

3.) On a short - I always want to add to it by selling lower prices

I realize this is completely couterintuitive but it will save , and ultimately make you money in the long run


Take Care

Good advice.

 

[Redneck]

Wittgenstein,

Thank You Sir





HSC.1775

Please educate a Redneck my learned colleague

How long must one trade in order to know - exactly what price will do next - so I won't need to worry about loosing trades - and I can eliminate my - "never average down rule"

And for that matter once you enlighten me sir - I won't even need to worry about adding on to winning trades - They will all be winners - and I can just enter with my full allotment :eek:

Just curious that's all

 

[piezoe]

Quote from NeoRio1:

The context of course is spot on.

You can trade/invest in companies in the context of holding onto something for years.

You can trade monthly and yearly trends.

You can weekly swing trade.

Ect ect ect.

You MUST MUST MUST know the simple details of a trade.

You first figure out what to trade. You figure when to trade it. You figure out how to trade it. You figure how long you trade it for.

Be cold and calculating.

If you feel any emotional attatchment or bias at all slap yourself in the face.

I like this response, as it is responsible and sensible. Averaging down is not always disastrous if used in the context of investing when you are building a position. But of course the same rules of money management apply and you must be beware of the dangers of leverage and of having too great a percentage of your capital concentrated in one position. You have to carefully consider the worst case scenario and never put your entire portfolio at risk in a single position.

In recent years I have often sold puts, unleveraged of course, when implied volatility is at atypically high levels and when i would like to acquire a stock. Sometimes I am assigned and sometimes not, but in general not. And I have sometimes used this approach to average down. I am always prepared to wait a very long time for positive returns when I do this, and am highly selective. A warning sign that you are taking on too much risk when selling puts is a return exceeding an annualized rate of return greater than 20% should the puts expire worthless. This often means that instead of selling atm puts you must sell puts two strikes below atm for less. Do not try to obtain unreasonably high returns from the market. That, in my experience, seldom works out well in the long run.

 

[u21c3f6]

Quote from innovest_11:

Maybe i too unwilling to take a small loss, and got into trouble by adding size, and going against the trend, thanks for all advices given

Ding ding ding ding ding!!!!!

This IMO is one of the essential "skills" that one must learn when trading (gambling), how to take a loss. The whole idea is that you will not "win" all the time. The "trick" is to collect in total more on your winners than you lose on the losers.

 

[swtrader]

Quote from innovest_11:

Down -5000 because of using averaging down today, keep buying when it goes new low, and it keeps dropping and dropping and droppinggggggggggg...........................

Initial loss of -$1200 balloon to become -$5000. Cannot believe my months of profit just wiped off in one day.

I don't think I'll do anymore averaging down and if i do, i better watch my size

never ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever average down

 

[eagle]

Thats came from somebody who had experienced that situation. Almost every trader had at least one time experienced it. The solution is to write down deep in our mind to never go into that deadly path again.

Quote from swtrader:

never ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever average down

 

[dont]

If you want to average down rather say gee its really cheap now I'll buy it from myself. But never ever add to the position.