Pyramiding: Playing with the market’s money

[Xela]

If there is value and i get in and it goes against me but my premise is still correct ..just my entry was off ...and the market hands me the opportunity to buy something of value, at an even greater discount, well caramba, I’m taking it. Wouldn’t you?

Normally, I wouldn't; no.

For three main reasons ...

First, the "something of value" is relative, and the more its price is discounted when I've bought it, the more it starts to look like potentially "something of less value";

Secondly, the "if" in "if ... my premise is still correct" is becoming bigger and bigger, as the price moves in the opposite direction, and I'm honest enough with myself to acknowledge that;

Thirdly, my decisions are probability functions, and they need re-assessment in the light of subsequent events, and I don't pretend otherwise: I've noticed that some people who do pretend otherwise seem occasionally to make some hugely expensive mistakes, and I'm too risk-averse to want to increase my chances of joining them.

So I take my hat off to people who can achieve that with perpetual success, but I can't, myself (and to be completely honest I don't really aspire to, either - it doesn't seem to me like a particularly good use of my skills, effort and energy).

Just my perspective on this ever-thorny subject.

 

[ironchef]

Traders and investors live in different worlds.

 

[volpri]

Well you got your reasons. I see things, in some ways, exactly the opposite. It is pushed down to go up. Creates buying opportunities for value at discounted prices.

Premise getter bigger and bigger is relationaly predicated upon what that premise was in the first place. As price tracks against me and I am scaling in I actually see that premise increasing in size and quality because I am getting more favorable discounted prices (up to a critical point). A move against me doesn’t mean my premise is wrong. It means my entry is wrong..early ..etc Problem with entries: nobody, absolutely NOBODY, will EVER be able to develop entries that 100% of the time have no adverse movement. If so, no stop losses would be needed as that is exactly what they are; a mechanism to NOT BE but to incurr a loss so as to preserve remaining capital. I had rather BE any day than incurr a loss from a stop loss. And scaling into a losing position is a mechanism to do that for me and to most of the trades end profitable and some with lots big profits.

I agree with the latter statement of re-assessment which is in fact the precise reason I choose to scale into a losing position and why I have a high win rate.

Finally, everyone aspires to something I suppose. We all have to build our own boat and float it.

 

[volpri]

Traders and investors live in different worlds.

Maybe not so much. I am an intraday trader. Many investors average in on losing positions. It can be quite profitable.

 

[tomorton]

What is your p&l distribution of trades where u do your averaging in technique?

I do something v similar. I have 70% losing trades, 20% small winners which dont quite offset the losers and the remaining 10% which are big winners and make all the money.

I never work out what the distribution is, it might even start asymmetrical like yours, but then I'm adding additional positions to the winning markets so that the ratio of winners increases dramatically. e.g. prior to December I had 5 parallel trades on the Dow, right now I have 3 on the Nasdaq 100 and 4 on the S&P. Similar story with forex pairs.

I'm not casual about this though, I am particular about capital risked per trade and overall profit. I can quote the theoretical r:r for multiple pyramid trades up to 21 (1:189!), but I never calculate these things once the trades are closed.

 

[ironchef]

Maybe not so much. I am an intraday trader. Many investors average in on losing positions. It can be quite profitable.

As a day trader, I think you are in the minority. Most of the day traders here said never average down.

I am happy for you, what you said shows there is more than one road to winning trades.

Regards,

 

[volpri]

As a day trader, I think you are in the minority. Most of the day traders here said never average down.

I am happy for you, what you said shows there is more than one road to winning trades.

Regards,

Yes many, maybe most, daytraders on ET probally don’t average down or scale into a losing position for a reason. It can be risky. And to do it successfully takes practice and the ability to read price action, really good, consistently, and have confidence in ones read of PA. The confidence comes from practice. Anyone attempting it should first practice ALOT on a SIM.

That said it can be quite profitable and psychologically uplifting. But it has to be done with strict risk management and discipline.