Hi, explain to me how adding to a WINNING position is profitable?

The thing is your "maximum" changes on strength. That's the idea-to use your open profits for additional margining.

For example: During the recent Euro-FX decline one would've been able to double down (if so skilled or inclined) several times and wind up with 10x their original size on. All financed with open trade equity.
Quote from Cutten:

You need to forget this whole backward-looking irrelevant focus on what you did prior to the current price. The correct position at the current price has NOTHING to do with any trades, NOTHING to do with your current position. The correct position is purely a function of what the future market action is likely to be, and your risk tolerance.

"Averaging in" or "Adding to winners" are misnomers that take away the focus on the current and future market outlook. That's what should determine your position size, not what the price did in the past, where you entered, whether you were long or short, or what position size you had on previously.

I.e. if bonds are going to skyrocket, the right position is a maximum long position. Doesn't matter if you were short, flat or long; whether you averaged in, pyramided, or just bought once and held. Doesn't matter if you are long a full position that is 20 points offside from 9 months ago. The right position is identical in all cases - maximum long.
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Closeout the first trade at 105. On pull back.. re-enter as a new trade with larger position. Each trade in any averaging down scenario should still be calculated on its own. Your net is the averaged results.

If this is a short term play why not add to your position with options?

We algotrade a 5 strike averaging down system for ES futures. Trade add increments are 1 - 2 - 6 - 18 - 36 at -5, -12.5, -17.5, -25 points from entry. Averaged down position costs are 2 1/2 points off market with an exit of 2 points. Trade long and short sets concurrently and cover roughly 50 points of intraday swing.

Always at risk of 54 contracts running away so we hedge each side with 50 OTM options. As tradesets exit profitably we liquidate the profitable options leg and reset... every 3 - 5 strikes.

If either of the tradesets exceed 5 strikes trading range without checking up 1 strike to exit our safety stop/options hedge kicks in and the tradeset is liquidated with minimal damage.

The options hedge covers 1/2 of the loss and the counter tradeset generated profits of 1/4 / 1/2 depending on swings before the stopout.

Averaging down using hedged and balanced tradesets will greatly reduce your risk of blowing out your account. Generally will make you a profit... Depends on the instruments you trade... liquidity and volatility and your ability to execute without error...

You'll take a hit every now and than but it equates out to a small loss in the grand scheme. Your options should overtime cover all losses and make you a profit.

Kind of like going to Vegas and having 50 to 1 payout on a bet each time you do not hit red or black 5 times in a row. You decide to play both red and black... and you buy insurance that covers 1/2 loss if you do hit 5 in a row and payout 1/4 each time you don't.

The Odds are no longer with house... A game like this in Vegas would get shut down in a hurry. Welcome to the zero-sum game of Trading Futures and Options... You can play as long as you ante in your exchange fees and broker commissions.

Intraday only...
Trade often... double and average down on your losing positions, take small profits every chance you get... don't let your winners run... Buy way OTM options as a hedge.

Just about everything your taught not to do... makes profits!
 
People with big money bet on the behavior of Markets_

They follow what is called Trend Following which is based on the presence of Fat Tails.

Research those two things and you have your answer.
 
You need to add to a winner only if the price is close to your entry. This works best for day traders. For swing traders its more difficult because the markets are extremely volatile and there is no well defined trend now, thereby making the 'adding to winners' strategy less effective.
 
I use price and essentially I am so early to the trade now the rest of the market hasnt seen it. I can then add to it again before the real move happens.
 
i am curious about this too... as it make some sense to me although im not sure if its the traditional reason for adding to a winning position.

i figure that by doing this, you get in your positions with low size so that if it goes against you, your losses are less.. although if the trade does go in your direction you put the rest of your money in it and profit from the good trade..


make sense to anyone?
 
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