Averaging Down the real Holy Grail

In a deep Jack Hamby moment I thought I would add this:

It really all comes down to this. I simply dont believe analysis ends when a trade is taken. Its just not that simple to me. I cant analyze the market up until the moment I am in a trade and then say "OK money management take over from here, whatever happens happens." To me, that is as ludicrous as the original posters title to this thread. The market is always moving, always giving information, always changing before, during, and after a trade. And to exit a trade simply because your stop limit was hit is not good analysis to me. Perhaps your stop was hit by a run on stops. Perhaps some idiot on tv said something that caused a quick panic. Perhaps you just goofed up on seeing support. Whatever. The point is if the market is telling you to take another trade and you dont because an existing trade is in the red, then it seems to me that you are missing out on great r/r opportunities, and taking unneccesary losses. You have to know when the trade has gone against you, yes. But, you also have to know when the trade is simply still in the process of being validated.
 
Quote from jfilla:

In a deep Jack Hamby moment I thought I would add this:

It really all comes down to this. I simply dont believe analysis ends when a trade is taken. Its just not that simple to me. I cant analyze the market up until the moment I am in a trade and then say "OK money management take over from here, whatever happens happens." To me, that is as ludicrous as the original posters title to this thread. The market is always moving, always giving information, always changing before, during, and after a trade. And to exit a trade simply because your stop limit was hit is not good analysis to me. Perhaps your stop was hit by a run on stops. Perhaps some idiot on tv said something that caused a quick panic. Perhaps you just goofed up on seeing support. Whatever. The point is if the market is telling you to take another trade and you dont because an existing trade is in the red, then it seems to me that you are missing out on great r/r opportunities, and taking unneccesary losses. You have to know when the trade has gone against you, yes. But, you also have to know when the trade is simply still in the process of being validated.
More...

.....but at the same time you need Risk Management so eventhough it looks great on paper, preservation of capital is much more important than the supposed "great" fill.

Anek
 
Quote from Anekdoten:

..but at the same time you need Risk Management so eventhough it looks great on paper, preservation of capital is much more important than the supposed "great" fill.

Anek
More...

-- I dont quite follow, would you mind elaborating a bit on your comment? Im definately not saying dont have a place of exit for a bad trade. What I am saying is that place of exit is constantly evolving in a trade.
 
Quote from jfilla:

-- I dont quite follow, would you mind elaborating a bit on your comment? Im definately not saying dont have a place of exit for a bad trade. What I am saying is that place of exit is constantly evolving in a trade.
More...

All I'm saying is that if your original entry was not so hot, I prefer a quick stop and a re-entry on further confirmation that price action still is unchanged.

Anek
 
Quote from Anekdoten:

All I'm saying is that if your original entry was not so hot, I prefer a quick stop and a re-entry on further confirmation that price action still is unchanged.

Anek
More...

-- Fair enough. But to quote you: "it looks good on paper". Would you mind discussing how you would have determined that the entry was not so hot? Let use an example, which may in no way reflect the actual way you trade, but humor me:

Lets say the market was trending up, and made an intermediate top at 720 around 10:15am. It then traded down over about 15 minutes on average volume to 700. You go long @ 700. Now that you are in the trade, where is your stop and where is your target? Is it always fixed, or does it move based on what you see? Are you out on a quick drop to 690? Or a deep drop to 680? If you get stopped out and the market starts a run back to 700, do you place a limit order before it gets there and wait for it to get hit on the way up? Do you wait for it to cross 700 before reentering the trade? If so, were is your new entry?
 
It seems that the time frame of the trade has a lot to do with wether averaging down should be used. At least in my experience. I never average down on scalps or day trades but use it often on swing trades.

If I enter a swing trade that my analysis shows should last a few weeks, I often average down on pullbacks during the trade.

For example, I know that the price will not rise in a straight line to my target price. So, at resistance levels, I sell off a few contracts with the intent of buying them back as the price pulls back.

I may not know exactly how far the price will pullback so I average down as the price retraces. If I am not fully back in when the price resumes the uptrend, I just buy it all back as it crosses thru the original resistance level.

Since my intention from the beginning is to be long on a swing trade, anything I pick up on the averaging down is gravy.

If the price continues to fall and hits my stop, at least I shaved off some of the losses.
 
Evidently all is working great.

I apologize for not having the skills to buy the absolute low from the start but the second best thing is working great.

Have not suffered a loss since August and previously in February.

Things are looking good :D

ADK
 
Quote from Avgdownking:

Evidently all is working great.

I apologize for not having the skills to buy the absolute low from the start but the second best thing is working great.

Have not suffered a loss since August and previously in February.

Things are looking good :D

ADK
More...

Anecdotal evidence alone cannot adequately demonstrate the effectiveness of a technique of position sizing.

Smply put, you have not come close to proving that averaging down is the "holy grail." Moreover, you have not overcome my objections that averaging down is an inferior position sizing technique.
 
In my experience, a trading strategy that averages into a position using multiple entries during a minor retracement from a major move is a sound practice.
This provided that the entry level is narrow and made at a price level that proved to be and continues to prove to be resistant to further retracement.

When it gets dangerous is when the entry levels are made before the retracement has gained some footing.

I suppose strongly adhering to stops that trigger as you average into a position that doesn't stop going against you could save you from eventual catastrophe.
It may also prove to be profitable in aggregate

However, unless you are going to program these rules into an absolute quantitative model with no discretion, I object to the nature of entering a position during a retracement that hasn't yet re-established its footing for 2 reasons:

1. I think a more profitable strategy is to wait for the retracement to cease & then begin "averaging up" into the position as it attempts to re approach the best price it retraced from. You are still capturing a better entry (compared to entering the high/low of the original move.)
but most importantly;

2. I am genuinely fearful of the potential arrogance that risks being reinforced as one books repeated profitable trades resulting from making entries as the market moved against them.
This is an entirely common trading pitfall that I have seen far too often in all kinds of traders, including myself.
I have seen individuals slowly build their accounts (not to mention their arrogance) into the millions ....only to be ENTIRELY wiped out as a result of 1 or 2 trades where they bet too much against the market.

I much more recommend using a style that gets one used to swimming with the current.
 
You must log in or register to reply here.
Back
Top