Averaging Down the real Holy Grail

At first it is a stressful tactic, that one I will accept. Once the system is polished to avoid blowing up, it's an ATM.
You can't be stubborn about it, in fact, it probably requires more discipline than any other money management strategy.
Ask me when was the last time I blew up with this ?
Because I honestly do not recall it.

Just trying to help not harm. Try to look deep inside the taboo and maybe someday you see the light. Now I need to convince Anek to give me an AHG version of averaging down, sort of like asking the Pope for a condom rofl.

ADK
 
stay on the right side of MA
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Quote from hwkaiser:

Sincere inquiry...
I am Curios why you say AHG does not work on stocks... perhaps not in a scalping environment... but imho, I believe many of the basic principles in risk management, entry/exit, pattern recognition can be applied to most instruments. Anek shared many ideas and a simple methodology in a concise manner which have augmented my trading in equities. I would be interested to learn what portions of his technique would not apply...

Good trading to all...
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I agree that the patterns he discusses in AHG will work but these augment AHG and are not core to it. Triangles, double bottoms, etc..

AHG is about going in on trend pullbacks and (advanced) avging up but this does not happen often with stocks. This is much easier done with very high volume instruments like index futures - the whipsaws on standard stocks are brutal.

If I had a way to radar stocks that would tell me a strong intraday trend is developing, it might apply but i would only use it for very high volume stocks (low volume stocks volatility is too high and stop slippage is high)

Would you mind if i ask what stocks you use AHG on or how you determine which stocks to play AHG on?

Thanks!
Il2t
 
When averaging down, at what point is one wrong and should therefore take a loss? How many times should one "average down" until this point?

Please specify.

Those who average up, for example, would probably say that they would close out their positions when the trend went against them--i.e. a pivot point was breached.
 
Quote from smilingsynic:

When averaging down, at what point is one wrong and should therefore take a loss? How many times should one "average down" until this point?

Please specify.

Those who average up, for example, would probably say that they would close out their positions when the trend went against them--i.e. a pivot point was breached.
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Myself, I use support/resistance as points of either exiting, getting smaller or reversing. As well, if the indexes go strongly against my position.

Il2t
 
I think averaging down as part of a market-making type mean-reversion strategy can make sense. Yesterady I was experimenting with it, and trading fewer shares, and had positive results - I'm a newbie to constructive, profitable averaging down, but here are my observations:

Average down because there is a buyer in the stock, and a market is being made, and you are getting many constant opportunities to buy low and sell high, but because the range isn't precisely defined, and you can't sell the top tick and buy the bottom tick every time, you can still allow yourself to profit off the fluctuations because you're not just kicking a position when you know theres a buyer and there's a good chance it will go higher. I find this type of trading works best on a day like yesterday - a slow grinding chop.

Always have a hard stop loss, a maximum pain threshold, that is a reasonable risk.

Don't take on positions larger than you're comfortable with such that you can't maintain the discipline to let your winners run.

Make sure your personality is one that can handle a strategy with successive medium sized gains and occasional large quick losses.

Average down because you know what you're doing. This is the biggest key. Many new traders might be temped to average down because they are deluded into thinking that markets "will" reverse at somepoint and so as long as they hold on and lower their cost basis they will eventually get back to flat or even positive on a trade. Thus the hard work of finding a disciplined strategy that actually represents an edge isn't needed. If averaging down is part of your disciplined strategy that represents a statistical edge, then by all means add to losers.
 
I can think of three reasons off the top of my head why averaging down is a bad idea, EVEN IF ONE USES STOPS:

1. Less exposure when the position goes in one's favor immediately.

Let's suppose one is expecting to average down at least four times, for a total of five pieces of a position. To have enough capital with which to average down, the initial position has to be smaller, like 1/5.

Those who do not average down but instead place all planned capital on the line at one time will be there to take advantage.

Iow, the largest level of exposure is during a period of loss, and the smallest, during a period of profit.

2. Missed opportunity to take advantage of the current trend.

Good traders take advantage of both downtrends and uptrends. By averaging down, one is going against the current trend and is myopically not taking advantage of it.

If one is buying at, say, 40, and then again at 38, and then at 36, one is missing the move down from 40 to 36. The pops up in a downtrend should be shorted. But one who is averaging down will be less likely to take advantage of the situation.

3. Excessive drawdown.

Being profitable is the obvious goal, but the key is to do so with as little risk as possible, and with as little drawdown.

Averaging down works well most of the time, but it is the 5% of the time it fails that does the most harm.
 
Quote from smilingsynic:

I can think of three reasons off the top of my head why averaging down is a bad idea, EVEN IF ONE USES STOPS:

1. Less exposure when the position goes in one's favor immediately.

Let's suppose one is expecting to average down at least four times, for a total of five pieces of a position. To have enough capital with which to average down, the initial position has to be smaller, like 1/5.

Those who do not average down but instead place all planned capital on the line at one time will be there to take advantage.

Iow, the largest level of exposure is during a period of loss, and the smallest, during a period of profit.

2. Missed opportunity to take advantage of the current trend.

Good traders take advantage of both downtrends and uptrends. By averaging down, one is going against the current trend and is myopically not taking advantage of it.

If one is buying at, say, 40, and then again at 38, and then at 36, one is missing the move down from 40 to 36. The pops up in a downtrend should be shorted. But one who is averaging down will be less likely to take advantage of the situation.

3. Excessive drawdown.

Being profitable is the obvious goal, but the key is to do so with as little risk as possible, and with as little drawdown.

Averaging down works well most of the time, but it is the 5% of the time it fails that does the most harm.
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Well said.

If you don't mind, I'd like to add something to complete the above concept.

The times your trades are successful right away, you only win with a small size on.

In fact, the common P&L of those who average down shows many small profitable trades with a few large losses here and there.

I am not saying it doesn't work. I agree that with a correct money management in place it's difficult to blow up.

I am wondering how well averaging down would have fared during the volatile summer months.
 
Averaging down absolutely is the holy grail as an investment/retirement strategy but certainly not for a trading strategy.

Investments:
Lets say you put all your trading profits into your investment account and use it to buy SPY. Whether you dollar cost average into it at regular time intervals or you buy every 5% pullback - either way you will probably average a 10% a year in the long run. That's more than enough to retire comfortably if you do it for 30-40 years religiously.
I'm personally leaning towards buying every 5% pullback from a high water mark in the SPY. The average bear market is a 20-30% pullback so that would be 4-6 buys. A huge bear market could result in a 50% correction - which would be 10 buys (only once in a lifetime though). And then you can get 5-10% corrections pretty regularly in any bull market.
You absolutely cannot go wrong with this strategy so long as its a retirement strategy and you don't touch the money or tinker with the system until you finally retire.




Trading:
When it comes to day to day trading - confidence and consistency are absolutely critical. If your averaging down, even if it is only in the direction of the trend - you would've been far better off taking profits at the trend highs and waiting for a substantial pullback to reenter rather than not taking profits and averaging down again and again praying and hoping for new highs that may or may not come. If new highs don't happen and you have a full reversal then you end up taking a monster loss that totally zaps your confidence going forward. Just look at MBAGH - the guy makes like 5k every single day for 20 days and then on one day he loses 100k from averaging down too much. How'd you like to lose 100k on the last day of the month after being up 100k for the month on the previous day - the fruit of an entire month of work gone in a day. No human mind can continue functioning in that manner indefinitely.
 
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