Averaging Down the real Holy Grail

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

>>>This is really the point here. It's a matter of where in the market action one prefers to wade in: for some people, trying to catch the countermove extreme and averaging in if timing is off, or for other people, waiting a little for some momentum to confirm while using stops if wrong. Different styles=different orientations to risk and market opportunity..

ADK, wondering if you take partial profits on scaled in positions as market moves back up in your favor, or whether you stay pat and try and ride the whole load back up and onward.

Some people using the average-in approach take partials so they have ammo to re-enter even lower if neccesary.
More...
 
I haven't read this whole thread so maybe this has been mentioned...

There is such thing as averaging up and down in the same trade. If I'm taking a long position in anticipation of a breakout then I will be happy to buy it lower as long as the chart is "in tact". Meaning if I were to still view it as a long trade, then I'm willing to buy it. A stop point is where the trade is no longer in tact. Once you average down and the trade starts doing what you expected then you can also average up into the target breakout area.

I do this every day on every trade and it works.
 
Quote from Dustin:

I haven't read this whole thread so maybe this has been mentioned...

There is such thing as averaging up and down in the same trade. If I'm taking a long position in anticipation of a breakout then I will be happy to buy it lower as long as the chart is "in tact". Meaning if I were to still view it as a long trade, then I'm willing to buy it. A stop point is where the trade is no longer in tact. Once you average down and the trade starts doing what you expected then you can also average up into the target breakout area.

I do this every day on every trade and it works.
More...
I'm guessing that most people who average down are not quite as circumspect.

Even so, I have a question. If you average down while the chart is still intact by your definition, then this means that you have not taken a full initial position. Therefore, if price goes immediately in your favor upon initial entry, then you are traveling light until you begin to average up. On the other hand, if price begins to go against you upon initial entry, you add unless an uncle point is reached. This suggests that you will be fully loaded if price goes against you to stopout, whereas your initial position will be smaller if it immediately travels in your favor. And so my question is: do you think this the best way to go about it? As an aside, I'm guessing that you use relatively wide stops. Would that be correct?
 
Quote from irucken:

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.
More...

Well said...When trading discretionary,I often look for buy zones based on Fib retracements or some other voodo of a higher time frame,and then base entries on a breakout/ma cross of a lower time frame..IMHO,its the safest most prudent way to seek trade retracemets/extensions
 
Quote from taowave:

Jimmy,there has been many bold faced laws of trading posted on ET over the years,and I have found very few if any to have the universal truth everyone loves to preach of..The mantras can range from never averge down,to never scale out and always employ stops ...Proper betting size is far more important...

After extensive backtesting i have found no significant gains or losses by following any of the gospel of trading.There are no universal laws,and if there were,everybody would be doing them.

It really boils down to what style of trader one feels comfortable with,and what their tolerance for risk is.With that said you can follow the "universal laws" or do the exact opposite.As long as your strategy is fundamentally sound,and the risk is managed,there simply is no right or wrong way.....
More...
So true..and a hint, most all major institutional trading desks use dynamic entries (scale-ins). If you have a properly tested and analyzed entry method, that is of multiple entries, you are not doing anything terribly wrong. I would also note that dynamic entries are in no way a holy grail, just another means to increase the capabilities of a proven system.
 
Quote from Thunderdog:

I'm guessing that most people who average down are not quite as circumspect.

Even so, I have a question. If you average down while the chart is still intact by your definition, then this means that you have not taken a full initial position. Therefore, if price goes immediately in your favor upon initial entry, then you are traveling light until you begin to average up. On the other hand, if price begins to go against you upon initial entry, you add unless an uncle point is reached. This suggests that you will be fully loaded if price goes against you to stopout, whereas your initial position will be smaller if it immediately travels in your favor. And so my question is: do you think this the best way to go about it? As an aside, I'm guessing that you use relatively wide stops. Would that be correct?
More...

My average winning trade probably consists of 3-6 entries depending on how long it takes the trade to work out (and about the same # of exits). In the case where I can get shares lower, then I don't have to get as many shares at the break out as I would otherwise. That gives me a better average and allows for wider stops.

There are some cases like you mentioned that the trade just works too fast, and in those cases there's not much you can do.

Trading like this requires you to trust your gut instinct on whether the move is just a wiggle, or breakdown...assuming you have good instincts :D

Regarding how wide the stops are, when I see a chart as a candidate, I also see where I would consider the chart to be "broken"...that's my stop. Something like BIDU could have a $2 stop, whereas some trades can have a 2c stop.
 
I'm sure it has been said already but you have it exactly wrong, averaging up is the holy grail (this is distinct from scaling in to a position at a defined risk point or range).
 
Quote from Thunderdog:

I'm guessing that most people who average down are not quite as circumspect.

Even so, I have a question. If you average down while the chart is still intact by your definition, then this means that you have not taken a full initial position. Therefore, if price goes immediately in your favor upon initial entry, then you are traveling light until you begin to average up. On the other hand, if price begins to go against you upon initial entry, you add unless an uncle point is reached. This suggests that you will be fully loaded if price goes against you to stopout, whereas your initial position will be smaller if it immediately travels in your favor. And so my question is: do you think this the best way to go about it? As an aside, I'm guessing that you use relatively wide stops. Would that be correct?
More...

T-Dog,IMHO this magical topic really boils down to ones "Entry Efficiency"(For long positions,Highest price minus the entry price, divided by highest price minus the lowest price.)

If you have a winning system that shows an average Entry Efficiency,then scale in...And before I get jumped there are ways to turbo Entry efficiency,but thats classified:)
 
Averaging up or down has merits... I'll give an example as to how it can be done.

Let's say someone who is trading futures (ER or whatever index they trade), and typical account is 20k. The key thing here is to divide that account by 4 - this means that maximum number of contracts/positions traded is 4 with a value of 5k for each contract.

Wait till market is oversold, can use any indicator but easiest one is to wait for 3rd day down then enter first position. Market goes down next day (4th day) enter another position on a 10-pts. dip, and so forth. Each of the 4 positions is entered on 10-pt. levels.

This translates to buying dips for a max. of 4 days after market being oversold.

8 out 10 the market will have dead cat bounces or just start a new swing in opposite direction.

It's a simplified version. Hope this helps.

Cariocas
 
You must log in or register to reply here.
Back
Top