Average down - small wins, big losses?

[Simples]

I'd love to disparage averaging down, if it weren't partly a side-effect of a risk management model
Be very careful about using it as a vehicle for surplus income though, as it's the very opposite of what you're looking for in a trade. Only proper backtesting can tell you more about it really.

 

[maxinger]

This is how to trade.
Catch the first signal with hugh quantity (but be mindful of money managment).
as market moves along, reduce your positioin.


However, many people do the reverse.

Catch the first signal with meagre quantiy.
As market moves along (be it market move in your favor or against you), they increase quantity.
How to earn money in this way ?!?!?

 

[algofy]

I think handle averages down 17 times and has a 99% win rate.

 

[comagnum]

Having your largest size on when you are wrong is not a good idea.

“….. after the initial transaction, don't make a second unless the first shows you a profit. Wait and watch. That is where your tape reading conies in to enable you to decide as to the proper time for beginning. It took me years to realize the importance of this.” Jesse Livermore

 

[FreakofNature]

This is how to trade.
Catch the first signal with hugh quantity (but be mindful of money managment).
as market moves along, reduce your positioin.


However, many people do the reverse.

Catch the first signal with meagre quantiy.
As market moves along (be it market move in your favor or against you), they increase quantity.
How to earn money in this way ?!?!?

Wishful thinking.

 

[speedo]

Don't be afraid of losses, they are inevitable...be afraid of big losses, they are not.

 

[soulfire]

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?

"Averaging down" means different things to people, and it makes a world of difference on whether it's "good" or "bad" depending on how you are defining it.

1) If one is averaging down because they entered a trade expecting to make a profit, the trade went against them, and now they refuse to take the loss with a hard stop and keep buying at lower levels hoping for a reversal, this is the classic suicide trade that is the source of the majority of blown up accounts. It's Russian Roulette as those who continually engage in this behavior will eventually meet a mega trend that will wipe out their account with a margin call. This type of averaging down is to be avoided. Any method that doesn't include hard stops is just asking for trouble.

2) If your trading analysis has determined a trading entry range for your position that spans a few points, then the 1st point of possible entry and the hard stop of range exceeded will cover that entire range. In this situation, if you enter your full position at the first entry point, prices could still move lower to the last entry point, resulting is reduced potential profit and a bigger loss if stopped out. If you choose to wait to see if prices move lower past the 1st entry area, you risk the market reversing to your profit target without you having a position.

In this case, you want to split your position up and scale in- a portion at the 1st entry - the next portion at the next level (if it drops to that level), until you completed averaging down in your calculated entry range. Doing this reduces your loss if stopped out, allows you to get a better position if it continues to move lower, and ensures you will have at least a portion of your position in play if the market reverses to your profit target at higher entry levels. This is averaging down the smart way to reduce risk.

 

[FreakofNature]

Don't be afraid of losses, they are inevitable...be afraid of big losses, they are not.

A good chunk of small losses is the same as a big loss. Death by a thousand cuts can kill you too.

Too many taboos on this board, many ways to skin the cat.

Positive expectancy and psychological compatibility, the rest is bullshit.

 

[speedo]

A good chunk of small losses is the same as a big loss. Death by a thousand cuts can kill you too.

Too many taboos on this board, many ways to skin the cat.

Positive expectancy and psychological compatibility, the rest is bullshit.

The reference was to averaging down, not simply losses.

 

[Simples]

However, many people do the reverse.

Catch the first signal with meagre quantiy.
As market moves along (be it market move in your favor or against you), they increase quantity.
How to earn money in this way ?!?!?

Let me blow your mind for a sec: They "average up" anticipating an even larger/longer move (this is for longer term plays yes, and you do need to survive an initial retrace or two that may happen).

It's entirely dependent on how the "signal" is generated and how it performs in backtests.

How do people not get cut by putting on too large positions early on ?!?!?