is there ever a good time to average down?

[mute9003]

youtube says average down: bad. ape not strong when average down.

this is just for basic knowledge not any specific trade or anything im doing at the moment (before people start suggesting)

i know in general averaging down is bad.
is it dependent on the skill of the trader? like a professional trader would be able to average down with more success? or is it same for everyone because its a psychological failure and even the professional would be considered as compromised in that state where he has to average down means he panicked and shoult exit the marky mark


what about agressive averaging down to wait for a small retracement to exit at smaller loss? is that a strategy that is being used by traders?
like if a trader is able to drop the average price down to where the price is now and wait for a small retracement. obviously its more risk but also higher chance of exiting without a loss. or is it a flawed strategy? explain why if you say yes.

im also curious if algos are programmed to average down in any conditions ever?

 

[Snuskpelle]

Entirely depends on your position size.

If you have a stock position that's initially 1% of your portfolio, then it fall to 0.5% of your portfolio, and you average down by doubling it back to 1%, it's doesn't appreciably impact your ability to continue "playing the game".

If you start with an outright futures position of e.g. 500% leverage then have to average down, yeah disaster will be there soon. Both because you already had a DD in underlying multipled by five and because you're about to make it even worse.

Is it an edge or not? Depends on the market behavior. If the market is mean reverting, it can be - if you don't use idiotic leverages like the latter example above. Overall though, assuming the market is neither mean reverting nor trendy (which is surprisingly often), there's absolutely no advantage. There is no intrinsic edge in trade structures either way, you just shuffle win probabilities to outsized losses, with the same overall expectancy. Aim for a win probability of around 50% because that is the easiest to analyze.

 

[tomkat22]

Only time I ever averaged down was in about 2010 on F. I bought it at about $18 and sat by idly as it dropped to $11. After a few months it was bouncing between 11 and 12 so I said thats it,I want out. So every time it hit $11 I added more shares and was able to get my cost basis down to about $17/shr. It eventually touched $13 and I closed the position for a $4/shr loss. I dont do stupid shit like that anymore.

 

[murray t turtle]

Only time I ever averaged down was in about 2010 on F. I bought it at about $18 and sat by idly as it dropped to $11. After a few months it was bouncing between 11 and 12 so I said thats it,I want out. So every time it hit $11 I added more shares and was able to get my cost basis down to about $17/shr. It eventually touched $13 and I closed the position for a $4/shr loss. I dont do stupid shit like that anymore.

%%
THAT's abouy what F is now LOL
In hindsight/ better to add once or more to a winner .

 

[Picaso]

Averaging down (for individual traders, it may be different for very large funds) is by definition an attempt at being proven right as opposed to making money.

So if you want to "be right", by all means, average down. It'll improve your winning percentage, but will hurt your profitability and depending on your leverage (as @Snuskpelle pointed out), you'll face a much higher risk of ruin.

If you want to make money, never add to a losing position, add (within reason) to winners (as @murray t turtle said).

 

[2rosy]

im also curious if algos are programmed to average down in any conditions ever?

yes, market making bots. accumulation algos. averaging down when investing long term works for me or in panics. maybe, the only place where it doesn't make sense is if your strategy is short term prediction, place a bet, and fail.

 

[tomkat22]

It goes without saying that when you average down(or up for a short position) you increase your exposure and even a tiny move for or against you becomes amplified. I took a chance and kept adding to the F position because I felt it had stabilized around $11/12. If it had kept dropping I would have been in a bad way.

 

[SimpleMeLike]

youtube says average down: bad. ape not strong when average down.

this is just for basic knowledge not any specific trade or anything im doing at the moment (before people start suggesting)

i know in general averaging down is bad.
is it dependent on the skill of the trader? like a professional trader would be able to average down with more success? or is it same for everyone because its a psychological failure and even the professional would be considered as compromised in that state where he has to average down means he panicked and shoult exit the marky mark


what about agressive averaging down to wait for a small retracement to exit at smaller loss? is that a strategy that is being used by traders?
like if a trader is able to drop the average price down to where the price is now and wait for a small retracement. obviously its more risk but also higher chance of exiting without a loss. or is it a flawed strategy? explain why if you say yes.

im also curious if algos are programmed to average down in any conditions ever?

Hello mute9003,

I do it based on how I feel at the moment in the trade.

If I feel like I can get the win and I am losing, I most certainly average down.

Everything is based on feelings and my best guessing at the moment. I do whatever I want to do. There are no rules.

 

[volpri]

For myself it all depends on the context of PA:

1) A few bars back up to the present bar.

2) And “how” the immediate PA is (behavior) is being made at the point where I am considering adding to a losing position.

3) Are the bars large or small. (Spread)


If context supports it I will considering scaling into a losing position (nice semantics for averaging down lol). But then I am a scalper and expect to be flat within a few seconds or a few minutes.

I don’t use VSA but this link does explain somewhat the things I kinda look at as I decide to scale in or not.

https://www.marketvolume.com/vsa/spread.asp#:~:text=Spread is the difference between,bar's low) in analyzed period.

 

[maler]

If your reason for buying remains intact and you have not yet put on all the risk allocated to this bet then averaging down is great. That is why it is very important to know when the reason for buying becomes invalid. If that happens you get out, no wishing, praying, or some other excuses.

A common mistake is not recognizing when the reason for buying is no longer there, or not having a good reason for buying to begin with, but only a hunch, in which case averaging down is throwing good money after bad.