When one averages down on a position, it entails taking only small winners when the price moves in the direction of your position instantly and does not allow for more entries at a better price. On the other hand, your losses are made with your biggest position size. So, you have small wins and large losses. How can that be a profitable strategy?
All my systems are automated now, but no matter, they average down whether scalping or day trading. I had to build your systems differently in which my goal is to get the greatest percentages to make on original entry of "BE" plus one tick, then profitable trades of 2-8 ticks, but I had to get losses 6% or lower. As far as day trading, I had to be better than think I was capable to hit this mark cause if giving the trade longer than "mean" average to get to BE plus one tick, going to be losing for the day, day trading usually has higher losing percentages cause am hoping for larger profits. I have to take the opinion that profitable trades allow me to get in and quickly goings in my direction, so my patience is thin on time. Because day trading systems for me have higher losing percentages, reduction of signals to only take certain signals to ave down and other signals don't ave down. When I speak of BE plus one tick, if you averaged down at 8 separate levels, all exit at the original BE plus one tick so I might end up getting +9, +8, +7...+1 or if happens fast enough you can get +16, +15, ....+8 if 8 ticks was original target, all can be at that target.
Now the bad news, more levels you put on, your loses will be like to stubbed both toes on up to top of your head and wishing you never heard about averaging down. When I first started doing this, it would be 3 months of hard work tossed out the window of profits killed from one trade, little by little you learn to read charting better, rely on your back testing more and "time" to get to BE plus one tick. I have 8 signals with trend and 2 counter trend, risk is shorter on counter-trend on sell side in mornings where there is greatest volume. I mainly ave down on Scalping systems, and no, I do not make wildly profits per trade with ave of $12 to 17, getting harder as the markets going higher, bars gets tighter.
For me, am able to ave down on almost every Buy signal but few on sell signals, my losing percentages are better on sell side. So for whole week you could have been up for the week, but one trade the big stop loss price was hit and BAMM wieners for dinner. You have to do an insane amount of back testing and be firm believer of your stats to identify that in long run it works for you. I have reduced my levels but increased size to adjust to changing conditions in ES, retracements not as deep for me.
I never advise to average down to anyone, you have to be able to trade and not concern yourself about the money and won't get suicidal thoughts.
