Quote from Piffle:
There are 2 threads going on at the same time with a similar topic, so I'll post my point from the other one here. What happens when you pick the right stock to start entering, but you only have a tiny initial position on when it shoots up in your favor. You have the smallest position on when you are right. Conversely, what happens when you average in all the way to bankruptcy? You have your largest position on when you are stuck with a stinker. This doesn't seem sound to me.
Two parts to this query. First, I can't recall a single time I've ever done this where my initial order turned out to be the exact top or bottom. I wish I were that good.
Second, as far as "averaging in all the way to bankruptcy", that isn't possible if you practice sound money management with respect to your trade. For instance, I never allocate more than 20% of my total net worth to any single asset position. Therefore, even if somehow I turned out to be completely wrong and in a hypothetical scenario the asset went to 0 (which is strictly hypothetical, since I don't trade individual stocks or assets that could ever go to 0), I am never at risk of permanently crippling my net worth.
Furthermore, if you establish a methodical ladder of orders using only small incremental amounts at each rung, you give yourself plenty of room to accumulate a position at more favorable prices, even if it goes to a much further extreme than you had anticipated.
And finally, you have to know why you are getting into a position, as I described previously. If you are stuck with a "stinker", chances are you didn't do your due diligence to figure out why you were entering that position to begin with, or you didn't heed the reliable indicators that can be used to guide the wisdom of the position. I won't get into all the philosophy behind how I trade and why I choose the assets I do, but needless to say by following a strict methodology, this strategy works for me better than any other I've ever used.
Why not wait until you think it at the actual bottom and enter then? Is it because you don't know if the spot you are entering has a positive expectation? If you don't know where your best point of entry is to maximize your expectation, I would argue that it is very possible you are using scaling in as a crutch. No amount of scaling in can beat entering your entire position at the point of your best expectation as far as returns. This is a mathematical fact. Anyone who has done extensive backtesting with various entry/exit models knows this.
Why not wait until I think it's the actual bottom? Because I'm not stupid or arrogant enough to think I could possibly pinpoint at one exact price level an exact bottom or top. Talk about arbitrary! If there's one thing I've learned over the years, it's that the market couldn't care less about what my "expectation" is as far as exact price levels. It will bottom or peak where it bottoms or peaks, regardless of my expectations. But if I can use reliable indicators (which I can) to identify general bottoming or topping processes, then I don't need to pinpoint a single price level. See my above example with GDX.
Ultimately I couldn't care less about what you wish to call it, the only thing I care about is what it does for my brokerage account balance. So call it a "crutch", call it a "strategy", call it "tiddlywinks" for all I care, it matters not to me.
If you are trading a "system" that you have not tested and have no idea of where to enter to maximize your expectation, and are more trading your "gut" maybe this isn't correct for you. I have no positive trading experiences with gut trading, so I can't speak to that.
Nor can I, since I'm not trading on "gut" instinct either, I'm most certainly trading a system. You seem to be stuck in the mindset of "maximizing expectations", which to me is nothing more than picking an arbitrary level and hoping you were right about that exact level. Which to me is no different than going to roulette in Vegas and betting it all on 23 black. So if anything, trying to pick one singular price level as an absolute entry is far more of "gut" trading than the method which I employ. But hey, to each his own, if it increases your brokerage account balance consistently, it's all good.
