I have a question for the OP regarding if he uses this method to a) blindly assume that he can average until he eventually turns a profit, or b) turn a losing trade into at least a better losing trade using info from the market?
While "a" appears nearly impossible, and would require some substantial capital to actually survive the inevitable super loss, "b", in my opinion, is a very good strategy for experienced traders.
For example, lets say I go long YM on a pullback of the trend around 13700. The trade meandors around for a while and breaks down to 13680, which I know is another area of support. At this point I am down 20 ticks. However, 680 is still a support level for the main trend I am in. Its also a level where I would take another long trade, even if I wasnt in the current losing trade. So, I avg in another position. I havent averaged into a losing trade, because I am still not sure the original trade is a loser at this point. I am down, yes, but the trend has not been confirmed as changed at this point. Rather, my original entry was more likely too early on my part.
So now I am long 2x my original trade at an average of 690. If the trade now begins a rally back to 690-700 and confirms the existing trend, I am out breakeven or better. I have to determine if there is enough momentum to sustain a move back through previous support(700) or if this is in fact the lower high of a change in trend and exit accordingly using the price action the market is giving me.
The second outcome is that another wave of selling comes in and drops the market down to lets say 16660-55... At this point, I now have more information telling me that my original trade and secondary trade are incorrect. So i would exit both of them, preferably on some weak bounce.
I havent actually run any numbers, but I would guess to say that this strategy goes my way 9 out of 10 times. The key to all of this is that I never enter a new position fully leveraged. I know that I am human and make mistakes. I may misread the market, jump to early, jump to late, etc., so I use it to my advantage.
Ive read the arguments that this strategy simply means I am under leveraged on winning trades, and over-leveraged into losing trades, but there is a fatal assumption in that logic. This argument assumes that you know the outcome of any trade before it takes place, which is simply not possible. You may have a good guess, a high probability, a hunch, whatever..., but it all comes down to you dont know. You need information from the market, and the only way to get that information is to be in a trade. The trick is pulling the trigger win or loss when you finally have the information.
