Averaging Down the real Holy Grail

[cokes]

Quote from Avgdownking:

Oh and you must not be glued to your screen, breaking your back with swollen eyes.

Pre-program everything and collect when passing GO!

ADK

Please everyone realize discussing the general topic of "averaging down for infinity" is not what the author does. He uses sound money management. Lets all stay focused on what this successful trader is saying.

Below are the authors major points. I hope by reading these points this thread does not become an argument.

Quote from Avgdownking:
Averaging Down with money management and technique.

1) Enter minimal position every time a significant support level is reached.

2) Make sure there is a significant distance between
each support level for your next position assuming
you never reached your resistance target.

3) Sell at next resistance level

4) Rinse at repeat

5) When the trend changes, read when a massive support level is broken and held, take a loss and trade with the new trend.

the name of the game is support and resistance. That's it. Buy support in bullish markets, short resistance in bearish markets. Since markets are volatile you implement a responsible averaging down technique and off you go.
ADK [/B]

And below is one of the best quotes from AVGDOWNKING. He admits that for him finding the precise entry point was never one of his strengths. So he adapted.

Quote from Avgdownking:
Fundamentally speaking, averaging up is a great money management approach the big problem with it is that it requires great market reading skills and I think it works best on the big picture and not so much on the noisy daily basis. I'm sure Anekdoten does better in the long run with his technique unfortunately I tend to be wrong on the entry so many darn times I got not choice but to divide the entries at different support levels. I tried many times to cut my losses short the problem is I had so many of them the best I could do at the end of the month was break even so I had to cut corners and use averaging down so shoot me for using what works for me.

ADK [/B]

If we all stay focused on the original topic we can all learn something.



Thanks

Cokes

 

[cokes]

Quote from smilingsynic:

Swordsman,

On an intraday basis, how do you KNOW there even is going to be a "turning point"?

I bet the traders who averaged down last Friday were praying for just ONE turning point. Alas, it was not to be, and some trading careers bit the dust.

Trading is not about wishy-washy stuff like "context", it is principally about NUMBERS (Drawdown. Risk/reward).

Please show me how averaging down is MATHEMATICALLY a superior approach.

STAY FOCUSED ON THE ORIGINAL IDEA OF THE THREAD. I DO NOT KNOW WHAT YOU ARE READING BUT THE AUTHOR OF THIS THREAD NEVER SUGGESTED AVERAGING DOWN UNTIL BUST.

 

[NYOBScalper]

Quote from smilingsynic:

True, but that was not my point.

There are some countertrend traders who do not average down, but all of those who average down go against the trend. Likewise, there are some trend traders who do not average up, but all of those who average up are going with the trend.

My point throughout this thread is that on a RISK/REWARD basis, averaging down is a poor approach to position sizing, EVEN IF ONE USES STOPS. I am not denying that some traders make money averaging down (the question is whether they can KEEP it). But compare their drawdowns to their profits, and one would be less than impressed.

On a risk/reward basis, it is more prudent to sell rallies during a downtrend, and buy dips during uptrends. This conclusion is based, personally, on literally hundreds of hours of testing the data.

Averaging down means buying dips in downtrends, and selling rallies in uptrends, the complete opposite of what the evidence suggests is sensible. Sure, a good kicker might be able to kick a 60 yard field goal into the wind, and a decent quarterback might be able to complete a pass into double coverage, but wouldn't it be easier to kick with the wind, and throw a pass to a wide open receiver instead?

If there is an easier, surer way to success, why not go with it?

Right, I agree with you from my own personal trading experiences. What I'm saying is that I know traders who have very good risk adjusted returns, day in, day out, and their drawdowns are very impressive compared to their returns over the course of a day and their equitiy curves are completely smooth over the course of a week/month... and they're not fighting trends, they're involved in the other 80% of the time when markets aren't trending, and for them, not averaging down would not allow their strategy to work. This seemed absurd to me at first, but indeed it is true... your own testing isn't with a market-making style, so data supporting the conclusion that averaging down is overall inferior that doesn't test discretionary market-making styles precludes you from accurately making the sweeping generalizations you have.

(not trying to debate, just trying to alert you to what struck me, just as it is striking you, as absurdly odd and seemingly impractical/suboptimal, but in actuality is very effective with the right strategy)

 

[alpha-beta-blah]

Quote from smilingsynic:

Averaging down means buying dips in downtrends, and selling rallies in uptrends, the complete opposite of what the evidence suggests is sensible.

ummm...no it doesn't.

It means buying dips in up-trends and averaging into your position and selling rallies in downtrends and averaging into your position.

It is the way to go, that is unless your first entry always goes in your favor - I know mine rarely do.

 

[The Swordsman]

whoa whoa, trading is EXACTLY about context. Its the reason why some "head and shoulder" patterns play out classically and others dont. Its the price action leading up to these things that defines how they'll play out.

Let me just make this clear, I trade on the very fastest of time frames, I watch the DOM like a hawk to get in sync with price action. This is how I get my context, by studying all the action leading up to my decision points intraday. And there are many times where avging down is the right thing to do and other times when it clearly is not. Being able to see (and understand) price action unfolding in realtime and being flexible are key. Which is why you'll see price move down 3.5 pts over the course of 30 mins and see it move up 5 pts in 10. The market ALWAYS gets people leaning one way before ripping it in the opposite direction hard.

My suggestion to you is go back over the last 250 trading days and study all the intraday activity. See what patters develop. This is what I did and do all the time. And this is why I am spending time posting here. The thread starter makes great points but we are always told to NEVER avg down. In the right situations, its the absolute best way to trade. You gotta keep an open mind in trading.

Quote from smilingsynic:

Swordsman,

On an intraday basis, how do you KNOW there even is going to be a "turning point"?

I bet the traders who averaged down last Friday were praying for just ONE turning point. Alas, it was not to be, and some trading careers bit the dust.

Trading is not about wishy-washy stuff like "context", it is principally about NUMBERS (Drawdown. Risk/reward).

Please show me how averaging down is MATHEMATICALLY a superior approach.

 

[Avgdownking]

Quote from smilingsynic:


Please show me how averaging down is MATHEMATICALLY a superior approach.

Mathematically speaking I've been kicking the market's ass buying support levels since the creation of this thread because it has been a bullish market with some God sent dips.

It takes a nasty market reversal for me to take a loss, albeit a considerable loss. I've had two such losses this year. Each loss equates to an average of 3.5 winners because that's the risk level I am prepared to accept. Guess how many winner's Ive had. That's right, way way way way way way more than 7.

All in the math.

ADK

 

[smilingsynic]

Quote from The Swordsman:

whoa whoa, trading is EXACTLY about context. Its the reason why some "head and shoulder" patterns play out classically and others dont. Its the price action leading up to these things that defines how they'll play out.

Let me just make this clear, I trade on the very fastest of time frames, I watch the DOM like a hawk to get in sync with price action. This is how I get my context, by studying all the action leading up to my decision points intraday. And there are many times where avging down is the right thing to do and other times when it clearly is not. Being able to see (and understand) price action unfolding in realtime and being flexible are key. Which is why you'll see price move down 3.5 pts over the course of 30 mins and see it move up 5 pts in 10. The market ALWAYS gets people leaning one way before ripping it in the opposite direction hard.

My suggestion to you is go back over the last 250 trading days and study all the intraday activity. See what patters develop. This is what I did and do all the time. And this is why I am spending time posting here. The thread starter makes great points but we are always told to NEVER avg down. In the right situations, its the absolute best way to trade. You gotta keep an open mind in trading.

What you are describing here is countertrend trading. I do not have a problem with that.

Averaging down, as is its counterpart, averaging up, is a separate matter altogether: exposure.

Traders who are good at gauging intraday price action do not need to average down.

 

[smilingsynic]

Quote from cokes:

STAY FOCUSED ON THE ORIGINAL IDEA OF THE THREAD. I DO NOT KNOW WHAT YOU ARE READING BUT THE AUTHOR OF THIS THREAD NEVER SUGGESTED AVERAGING DOWN UNTIL BUST.

I didn't say that it did.

As I have said here, averaging down is a mathematically inferior strategy on a risk/reward basis EVEN IF ONE USES STOPS.

By averaging down, a trader is missing an opportunity to take advantage of the current trend. After all, if one is forced to average down, it is because the current trend has gone against the trader.

Why not take advantage of the current trend now, and then again, when the trend has changed?

 

[smilingsynic]

Quote from NYOBScalper:

Right, I agree with you from my own personal trading experiences. What I'm saying is that I know traders who have very good risk adjusted returns, day in, day out, and their drawdowns are very impressive compared to their returns over the course of a day and their equitiy curves are completely smooth over the course of a week/month... and they're not fighting trends, they're involved in the other 80% of the time when markets aren't trending, and for them, not averaging down would not allow their strategy to work.

How can it be the right strategy if "not averaging down would not allow their strategy to work"?

A strategy should be able to stand on its own. Position sizing is a separate matter.

Position sizing--increased leverage, in the case of averaging down--cannot in the long run overcome a losing strategy. The law of large numbers dictates that those kinds of strategies are destined to fail. It is only a matter of time.

 

[The Swordsman]

I think whats getting in your way here is YOUR definition of avging down and avging up, which is one dimensional like someone else pointed out. Just b/c you associate avging down with buying dips against a major trend doesnt make that the only definition. If price ticks one tick down and I buy, I am avging down even if the trend is up intraday, you gotta think of all the possibilities before saying that avging down is just plain wrong.

Quote from smilingsynic:

What you are describing here is countertrend trading. I do not have a problem with that.

Averaging down, as is its counterpart, averaging up, is a separate matter altogether: exposure.

Traders who are good at gauging intraday price action do not need to average down.