Quote from smilingsynic:
Many big winners in a trading system are winners right away (they have less maximum adverse excursion).
-- Cant argue there...
Averaging down ensures that you have less exposure on the winners that go IMMEDIATELY in the favor (the same applies to those who always use limit orders--they get filled on all the losers, for sure, but not on all the winners!).
-- Indeed, but it also means I have more exposure on the ones that do validate my ongoing analysis during the trade, which to me is when it is easiest to truly gauge the price action. To me, analysis doesnt stop at trade entry. It continues while the trade is developing, good or bad, all the way until exit. BTW, I only use limit orders, and now feel total inadequate due to your comment...
Of course, a trade may go against, and then come back. And, yes, a trader can average down and still come out ahead. But the price is drawdown. A profit of 5 with a drawdown of 5 is a heck of a lot better than a profit of 5 with a drawdown of 25!
-- I have to disagree here with your logic. Although sound, its not as effective in context. Using my previous example, if i entered at 700 and the market traded down to 695, and then back up to 705, I gained a profit of 5 for a drawdown of 5. However, if it sells down to 680, and I enter another position
because my analysis still says this is a good place for a long entry I have risked 1 trade for 5 gain and draw of 20, and another trade for 20 gain and a draw of 5, which to me is a wash..
You are right in that one can sometimes get out if there is a bounce. But what if there is not a bounce? The stronger the trend, the smaller the bounce, remember.
-- If there is no bounce, then clearly my analysis was incorrect all along, and Im exiting both trades for a loss. But, my initial entry was with trend, and until a lower high and lower low are made, my trade is still valid, just mistimed. Truly, Im not looking for a bounce, I am looking for a continuation of buying interest. If that doesnt come, then I am most likely seeing the end of the trend, and need to get out of the trade.
I have nothing against disciplined countertrend trading per se, but averaging down with that approach is playing with danger. I would guess that the majority of those who cancel their stops tend to be in that category.
-- Just for clarity, Im only talking about trading with the trend here. Trading counter-trend simply doesnt work for me. I did an analysis against all my trades a few years back, and was astonished to find that 84% of the time I trade with trend, I exit with profit, compared to 31% when trading counter trend. My style just doesnt work well counter trend.
PS. Thanks for the intelligent discussion smiley.....
)) then price will undoubtedly return to your initial entry level and you can re-enter. That is already better than averaging down as this time you do not base it on hope, but use common sense and hard facts derived from source - price.