Averaging down and scaling up as a trading strategy?

[ammo]

Quote from Plusactive:

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That being said, I also place a stop loss not more than my previous days profit.


,you could set a daily or weekly month limit loss and stop trading if you reach it related to your acct size, and then trade the same , a partial size up to a max size that stays within your loss limits when you have to cover because wrong,

your stop loss should be placed outside the range you allow for being wrong and staying in a trade, if you sold 55 but would go long if we go above 58,that should figure into your stop..,dont try to fit the market to your acct..should be market first , acct 2nd..markets always right, you, on occassion

 

[kid.fx.cross]

Quote from actionzip54:


Also, the main problem with averaging down is that you have on your biggest size on your worst trades and your smallest on your best. I'm sure it can be done profitably but you have to find a way to rectify the problem.

bingo, I am very conservative by nature, and that is exactly what happened. When I finally hit it just right, I had a small position on, and then the only way I had to bring it up to size was to add to winners, thereby constantly just getting out of the frying pan and jumping back into the fire.

the last hurdle to jump was getting over my fear of losing it all.

Now I just put it all on, and let them stop me out a little at a time. I hate it, because when I was averaging down I was getting such good fills at such good times. Now, I get stopped out at the worse time at the worse possible price.

But like you say, if you have multiple positions on, over time (and sometimes a long, long time, enough to make you old) your winners become large and your losers become increasingly smaller.

that doesn't mean I don't add to losers (or winners) but the market has to show me it is moving my way.

so that is just a convoluted way of saying I bet on the eventual trend. And it aint easy my friend, since most of the time the market just chops. And to add insult to injury, for about 8 months, a common martingaler can beat the shit out of you.

 

[mushinseeker]

Don't quite understand the aversion to averaging down. Most traders I know that have had persistent success in the markets seem to be in the mkt making, spreading segment and a good number of them average down. I think the critical aspect of what makes avg down work (scaling in - is the more palatable euphemism,) is the proper use of margin. If you think about it, there is a certain humility involved in scaling in- a "surrendering" to the stochastic process that trading is. The problem is when you have x shares to trade and you buy X at level 1 and when wrong buy x at level 2-now you are 2x and hanging on every tick to go your way after your 2nd entry. If you scale into your max position so you have X position, not 2x or 3x, you'd have a bigger loss envelope since you've got a better entry price.

 

[skFX]

Hey Mushin.
I would think that the aversion to averaging down is based on ones personal experience.

I am not for it nor am i against it,it's a strategy that traders use.
Those who spread trade and trade lower volatility instruments fair better maybe than those directional trading volatile instruments(CL,DAX etc)

Why do traders do it anyway?Is it because they don't want to be wrong?Is it because they feel that in the next 30min prices will move in their favor?Is it because now that we have moved 50tics lower it is a better buy?Or maybe because its the 4th wave down and it can't possible go any lower(roll eyes).

Problem most have(i'm talking 'blowouts' here)is when they average down and are fully loaded and they haven't accounted for 'X' happening.
When you haven't accounted for 'X', you are not managing risk correctly.

Traders who spread and play low volatility instruments,who understand fundamentals and who then understand that when the micro structure they are playing in is now leading into a major move against them on the macro structure, they then cut it and reduce risk.

I do average(rarely and only on spreads)but believe it to be on the side of being a weaker strategy.

For these reasons:
1.By entering another order to buy/sell when the initial position is incorrect,you are ignoring market feedback.
2.You increase your position in an already poor trade based on market feedback(for those of you who will say that you have accounted for the risk,that's not what i said.I said you've increased your POSITION).
3.By adding to an already losing position(based upon my exceptional market analysis and trading wisdom) i have now convinced myself that i know what will happen next....do i??!!
4.Once you've been filled on your second position,you've averaged down, you are now in profit......What a second,n o i' m n o t!!!
So you're telling me i've just added and i'm still losing?
5.Traders take extra risk on for very little gain.By the time price has reached their average entry price,they exit.Puke all over the place from stressing out."For goodness sake i just want out!".
Risk $2000 exit $40 (umm,this won't work)


Averaging down
So what now?
Well,you take a safe place.Somewhere quiet.Peaceful.Preferably away from family members and children(they mustn't hear the cursing when things get out of hand).
Once you're tucked away in that place,you get down upon your knees,place your hands together and begin praying,for you will need all the help you can get for the price to get back above your average entry price.All the while hoping that while you hold this position no #@! hits the fan.

Or,you can do exactly the opposite from the above and still make a million dollars a year...go figure lol!


rgds
SK

 

[mushinseeker]

Hi. I agree w your post somewhat. Most of the bad things associated with averaging down are prob primarily psychologically related (ie the need to be right,not owning your baggage,delaying the smaller loss, etc) and until trader comes to terms with those, it is truly dangerous ground. The counterpoint to that however, is that if you look at price movement with a certain amount of randomness with a slight skew towards whatever trend you are shooting for , then you can take advantage of the waves to work a lower avg price. The most important components of this scaling in is position sizing and patience. When you have a buy trigger on a bigger timeframe, you put your scale in with the expectation that prices will meander +_ a certain std deviation from a mean and trader can use the "pulses" to get in at a lower price due to his scale. The skill is in where to set the scale so that your max position is very close to your stop.

Thanks.

 

[skFX]

The most important components of this scaling in is position sizing and patience.

The skill is in where to set the scale so that your max position is very close to your stop.

Absolutely agree Mushin.

In the past if i've taken a hit then its because either i have gone to early with the scale in and/or i have been too aggressive with the size.

I have also learnt from experience that playing(scaling in) inside the structure looking for discount/premium when all the market wants is to either fill the pocket and/or run the stops above/below is a very bad idea.
You only have to look at YM NQ yesterday(see NQ chart) for a classic example of a rip/tear market.If you were looking to buy inside that structure(US session) on discount and did and you were scaling in,you would have had a sweaty overnight session.

I know traders harp on about playing the trends but i prefer to be on the right side of 'current price movement' than looking back a few hours and saying:"well,the trend is down i will sell".When all the while,the micro structure has turned and the market has clear upside momentum in the opposite direction to trend.
You get on the wrong side of current market move and against momentum and that leads into a new trend,macro speaking,you will be done and in short style.Game over.
Most won't stomach the running loss and will freeze,puke etc etc

To the ignorant trader he may be tempted to buy on pullback(to TL) or at key techs thinking he will ride the trend higher again,hitting the turn.Maybe even thinking that at these levels surely there is a mispricing(points x,1,2).I mean c'mon even at point 1 we've just undergone a stop cascade and are now sitting on the floor,surely it cant go any lower.....yes it #@!*ing can!!!
By the time price runs through the floor at 1,the poor guy doesn't know where to put himself,whether he should puke or pass out.
Little does he realise that that sweet uptrend that was there is gone and those beautiful buyside techies have been blown through,all the while the market has been going down since point Y.
What worse is that he's just ripped 50% from his account and next morning when he wakes up his exited trade from yesterday would now be sitting pretty on a asian/european price reversal.

All i'm going to say is there is a very fine line,and i mean 'very' fine, between making this work and not.
And as you mentioned whether you hit that fine line mostly has to do with what is running around upstairs in your head.

Can you handle this?
That is the question.


rgds
SK

 

[skFX]

The most important components of this scaling in is position sizing and patience.

The skill is in where to set the scale so that your max position is very close to your stop.

Absolutely agree Mushin.

In the past if i've taken a hit then its because either i have gone to early with the scale in and/or i have been too aggressive with the size.

I have also learnt from experience that playing(scaling in) inside the structure looking for discount/premium when all the market wants is to either fill the pocket and/or run the stops above/below is a very bad idea.
You only have to look at YM NQ yesterday(see NQ chart) for a classic example of a rip/tear market.If you were looking to buy inside that structure(US session) on discount and did and you were scaling in,you would have had a sweaty overnight session.

I know traders harp on about playing the trends but i prefer to be on the right side of 'current price movement' than looking back a few hours and saying:"well,the trend is down i will sell".When all the while,the micro structure has turned and the market has clear upside momentum in the opposite direction to trend.
You get on the wrong side of current market move and against momentum and that leads into a new trend,macro speaking,you will be done and in short style.Game over.
Most won't stomach the running loss and will freeze,puke etc etc

(NB.tried attaching a chart but as it appears its not so intuative to use.Now i understand why ont he forum there are very little graphics lol)

To the ignorant trader he may be tempted to buy on pullback(to TL) or at key techs thinking he will ride the trend higher again,hitting the turn.Maybe even thinking that at these levels surely there is a mispricing(points x,1,2).I mean c'mon even at point 1 we've just undergone a stop cascade and are now sitting on the floor,surely it cant go any lower.....yes it #@!*ing can!!!
By the time price runs through the floor at 1,the poor guy doesn't know where to put himself,whether he should puke or pass out.
Little does he realise that that sweet uptrend that was there is gone and those beautiful buyside techies have been blown through,all the while the market has been going down since point Y.
What worse is that he's just ripped 50% from his account and next morning when he wakes up his exited trade from yesterday would now be sitting pretty on a asian/european price reversal.

All i'm going to say is there is a very fine line,and i mean 'very' fine, between making this work and not.
And as you mentioned whether you hit that fine line mostly has to do with what is running around upstairs in your head.

Can you mentally handle this MO?
That is the question.


rgds
SK