Averaging down is addictive
- Thread starter Neet
- Start date
Don't see how this is risky if this means you are increasing your bet as you win and limiting your losing bets. Which product are you trading?
Quote from Neet:
Smiling,
I believe you have given new life to averaging down. I like what you said, was almost convinced but damn it, you gave the strategy hope !
Thanks.
I trade short-term (2-5 days), and according to my backtesting, averaging down can produce, over the long haul, a better risk/return ratio than one buy (or sell) only.
I would disagree with those that say that averaging down is the main reason why people destroy their accounts. I would say that the MAIN reason is because they are undercapitalized and/or overleveraged. Averaging down is one way to abuse leverage, but there are many roads to the house of loser.
If one recklessly averages down, then, yes, one will get burned. I'm sure those who kept averaging down in WCOM or Enron thought that they were doing the right thing. If one averages up recklessly or pyramids up recklessly, then that person will get burned as well.
One way to average down while reducing risk is to buy deep itm calls as proxy for the stock (calls are equiv to being long the underlying and being long a put). If you want to buy 300 shares of PG, buy three calls with a delta ninety or above instead. The problems people have with options are generally due to the reckless use of leverage. Instead of buying 3 calls in place of 300 shares of stock they'll buy 30 calls. When they inevitably lose it all on that eventual drop that turns the itm call to otm call, they'll say that they were burned because they traded options.
As if it were the options' fault.
Good luck.
I agree with SS. Averaging down, when done with restraint and low leverage, can increase earnings. Most of my systems have at least some averaging built in.
But you definitely need the right stock or security. For example, this one would have been the WRONG one!
<img src="http://ichart.finance.yahoo.com/z?s=MNCS.OB&t=6m&q=l&l=on&z=l&p=s&a=v&p=s"/>
But you definitely need the right stock or security. For example, this one would have been the WRONG one!
<img src="http://ichart.finance.yahoo.com/z?s=MNCS.OB&t=6m&q=l&l=on&z=l&p=s&a=v&p=s"/>
If you don't know which it is until after the fact (as I never do), then shouldn't you take the cautious approach?
I am trading YM,mini-dow...
The double edge sword method I am using works better if
there are more minor oscillations even when it is trending.
Any recommendation which index/product oscillates the most
even when it is trending?
Nobody does. But a measured approach is the best way to average. Thats all i`m saying.
exp.
You buy stock that breaks out. You dont want to miss a breakaway gap move so you add on the initial break. The issue throws back to support that used to be resistance. Which happens to be below your cost BUT still above the breakout level.
I trade a similar strategy but I will not recklessly average.
On the attached chart the down arrow and green bars indicate BUY sigs and the up arrows are points at which the issue "throwsback" to support but below initial cost.