Average down - small wins, big losses?

[schweiz]

If prices go such that you can average down it means you did not take a good entry. So the only real solution is to improve entries. You should solve the cause of the problem, not the result of the problem. Good entries are the first and most important step in trading.

Averaging down is (trying!) solving the result of of problem, not the cause.

Averaging down will for a very short time (seconds or minutes) improve your average entry price. But what people forget is that if things continue to go wrong this same action causes a bigger loss then the initial one. So in most cases averaging down is equal to increasing losses. Real traders always see both sides of any action: the good one but also the bad one.

Averaging down is only watching the “good side”, in other words: the side that results of wishful thinking.

If prices goes the wrong way there is always a reason why this happens, and most of the time it is not just bad entry timing, but misinterpreting the trends direction.

 

[Sprout]

Averaging down is (trying!) solving the result of of problem, not the cause.

If prices goes the wrong way there is always a reason why this happens, and most of the time it is not just bad entry timing, but misinterpreting the trends direction.

So true.

 

[CALLumbus]

You don't know when it will reverse. But you might be able to guess what the odds are of it reversing at a certain point. You will never make money trading if you are afraid to lose. You'll also drive yourself crazy trying to make perfect trades.

The notion that averaging down is for losers is absolutely incorrect. For a new trader with no risk management it can be very dangerous, but if you have your rules in place it can be the difference between failure and success. Obviously the usual place for averaging down would be a reversion-to-mean (RTM) trade. I'm not talking about midday news 5-10-20% news spikes, just morning or afternoon unusual buying/selling. When I see an RTM setup (which is where I make most of my $) there's an automatic thought process that happens.

1-How far is this likely to go?
2-How big do I want to be at the max range?
3-If I want to start scaling now what size should I start with?
4-After my initial position if I scale in every 5-10-20c what size do I place if I want to end up with my max size, at my max risk?

I don't cognitively think about these. I'll pull up a chart and in the back of my mind think (ok this may go $1-2 more in the next 1 hour, if that happens I want to have #k shares, if it goes further my max loss is $$k so that would get me out around xx.yy price. If it doesn't go to the extreme price I want to at least have xxxx shares, so I can make yyy to zzzz dollars.) This thought process literally takes a few seconds, and I'll usually already have my first lot. It becomes instinctive once you trust the edge.

Personally my max single RTM loss is around $10k. I hit this only twice this year. Find your comfort level and trade accordingly with rules in place and it won't be a problem. If I couldn't average down I would be working at Burger King right now.

 

[volpri]

Averaging down or scaling in on a losing position can be profitable but can also be very dangerous.

A trader has to have the skill well developed to detect a PB as a PB and not a reversal. You also need to know and be able to interpret the general context of PA. For instance, in an intermediate to strong uptrends when price starts having a PB and I can detect it as such (and not it being a reversal) then I can start scaling in. And scale in more as it continues down. There is a reason for scaling into a losing position. Basically it is to get an early entry before the PB ends and to lower the BE point and puts the odds in ones favor for a bigger profit once the trend resumes. Because a trader has built their position they are poised for quicker entry into a profit zone with bigger profit (because of multiple contracts) as opposed to just waiting for the PB to end and the trend resume before taking any position.

It is difficult to tell just when a PB will end to take a long position. But I could wait and let PA show the PB has probally ended and the trend has resumed. However, the downside to that is THAT price will then have to move further in my favor for my position to be as profitable as a several contract position that was already established when PB ended. If I have been averaging down during the pullback my BE has also been going down and my first profit point has also been coming down so once the trend resume I have an opportunity make money with less of a move and to make an enhanced amount if the resumption is decently strong.

But I would not recommend doing it unless one has become proficient in reading PA; the immediate PA and the GENERAL context.

In addition, an averaging in position has to be managed. There should be a limit on the amount of contracts or shares one would scale in with and a max loss one will allow before jumping ship. The reason being is that the more a trader adds to the position the more emotionally committed to the position the trader becomes to the position working out and it becomes easier and easier to just keep adding to it when it has become obvious the trade is a dud. My general rule is don't lose more on any averaged in position than I could make back in 1 to 3 days of trading. In others, never let the loss grow more than that and usually best to exit before that is reached unless there is a compelling reason to hold the position. I see price action a dynamic therefore even my orginal premise can change. For the max loss i will allow implies I have to know how much on average i can make back in 1 to 3 days.

PS The wins don't have to be small on averaged down positions but can actually be quite profitable if one hits it right.

 

[schweiz]

Averaging down or scaling in on a losing position can be profitable but can also be very dangerous.

So is pure gambling or throwing darts blindfolded to see what you should do.If you prove already that you cannot enter your first position on the right moment, you will not have the skills to find the right moment in the PB too.

If I have been averaging down during the pullback my BE has also been going down and my first profit point has also been coming down so once the trend resume I have an opportunity make money with less of a move and to make an enhanced amount if the resumption is decently strong.

If you get out at the start of the PB, and take a new full position after the PB, your profits will be bigger. You will lower the price of the full 100% invested money to the lower level. The only thing that is important is that you should be able to reposition the full amount at a price that would compensate for slippage and commissions. This can never be beaten by adding to a losing trade.

And on top of that you will never take the mother of all losses, which you can hit by adding to a losing trade as you never know how deep he can go. If you would know that you would not have taken the initial losing trade, but would have waited for the end of the PB.

 

[tomorton]

There is no objective way to know a PB is not a reversal. So continued buying in as a PB falls is gambling. Buying in on renewed strength is a viable trade as long as price has not fallen so far as to break down the bullish set-up in the first place. But either way, the important feature is the set-up, not the numerical value of the price, nor the unrealised profit potential / loss potential.

 

[ironchef]

Because I am a momo trader - I go long only on strength and and only add on to positions when I already have a decent profit from earlier positions. For longs I only enter at considerably higher prices - on moves out of congestion. I would never want to make a new entry if price is currently moving counter to my position(s).

The first entry was the second test of a major support line - when price crossed below it than closed back above support it showed strength & a rinse job to puke out the weak hands.

I see. Thanks.

 

[ironchef]

Yet its very possible for price to fall by massive percentages under the same fundamental environment. Unlimited fishing for entries which are lower and lower will lead to ruin sooner or later.

True, I should remember World Com and Enron.

SHLD is a current example.

 

[ironchef]

There is no objective way to know a PB is not a reversal. So continued buying in as a PB falls is gambling. Buying in on renewed strength is a viable trade as long as price has not fallen so far as to break down the bullish set-up in the first place. But either way, the important feature is the set-up, not the numerical value of the price, nor the unrealised profit potential / loss potential.

Can you explain what you meant by set-up?

Thanks.

 

[volpri]

So is pure gambling or throwing darts blindfolded to see what you should do.If you prove already that you cannot enter your first position on the right moment, you will not have the skills to find the right moment in the PB too.



If you get out at the start of the PB, and take a new full position after the PB, your profits will be bigger. You will lower the price of the full 100% invested money to the lower level. The only thing that is important is that you should be able to reposition the full amount at a price that would compensate for slippage and commissions. This can never be beaten by adding to a losing trade.

And on top of that you will never take the mother of all losses, which you can hit by adding to a losing trade as you never know how deep he can go. If you would know that you would not have taken the initial losing trade, but would have waited for the end of the PB.

Well if it is throwing darts I been throwing darts for years! Nobody that I know has 100% good entries. They can have the general direction right but just be off a little on their entry.

I'd bet you are too!

Everybody trades what works for them. Averaging down works well for me. I also have a high win rate on my trades. Usually above 80%. Sometimes over 90% win rate at the end of the day after several trades. That means I am getting the direction right even when my entries may be too early at times so, averaging down, as much as it is detested by educators, works for me and gives me profitable days with high win rates.

However, if someone has no discipline and no max loss for the day yes averaging down can be dangerous. If you know what you are doing it isn't so dangerous. Maybe you tried it and it didn't work for you? Doesn't mean it won't work for others. I do it ALOT!

You just gotta find the sweet spot for each instrument one trades.

I have heard just about all my trading life "losers average down". I can agree to some degree if they don't know what they are doing. If they do, then scaling into a losing position can be quite profitable and render a high win rate.

Most folks DO NOT understand the technique nor do they know "how" to do it.