I want to insert a note here about averaging down or scaling in if you can’t stomach the terminology of averaging down.
WHY DOES AVERAGING DOWN WORK? (Contrary to most traders beliefs)
In a bear trend (BO, channel tight or broad, or even a one bar trend that has a pB) if the pb stays below 2/3 of the height of the previous move (sell off) then the probability is that the bear trend will resume. If it goes above 2/3 then 50/50 it may resume (go lower) or reverse (go higher). However, the higher probability for resumption of the bear trend is when the pb doesn’t retrace more than 50%. Forget Fib numbers. They have nothing to do with market moves even though they can sometimes appear to. However a 50% pb is rooted in our psychology as humans. It is almost like getting something at half price of the present market value (think move). Chances are you will be able to sell the item for a profit. Or sell it and cover for a profit. The number .500 is rooted in our bargaining psychology even if we don’t realize it.
So lets look a a bear channel. Since bullish and bearish institutions are both active in broad channels (that is precisely why channels form) what are they doing?
In a broad bear channels the bearish institutions are taking profits at new lows and selling PB’s from those new lows and averaging down in the PB’s as they are taking place, while the bullish institutions are buying new lows and averaging down as it goes lower then selling in the PB’s that follow thus taking profits while trying to push price back to the BO point of the previous bear move in order to take profits. Once they push price back as far as they can in the PB they will then take profits on DT’s or sideways moves as the PB ends. They may BE on their first entry or make a little on it and make money on their subsequent entries.
See at the bottom bear are buying to take profits. Bulls are buying and averaging down positioning themselves for making profits in the coming PB. ALL this buying at the new lows is precisely what forms the PB and DB’s. Bulls will then try and push the Pb to the BO point of the previous bear move. Then they sell. What are the bearish institutions doing during the PB or near the end of it? They are of course selling to make the bear channel resume. So bears selling. Bulls selling, taking profits, at the peak of the PB and this selling is what makes DT’s ...pauses and prices start back south. All that selling!
Reverse this for broad bull channels. Think through it. This is why averaging down works. Now in a broad bear channel is it safer the join the bearish institutions or the bullish institution? What about in broad bull channels. What is safer?
Always remember, in broad channels both sides are very active. It depends on one’s account size and risk level as to what side they will join. If both institutions bulls and bears, were not active in bear channels, then the channels would not form.
Thus pay attention to new lows and DB’s and PB’s with DT’s and especially pay attention to any gap between the PB high and the BO point of the previous move south i.e. the bearish move before the present PB. If that gap holds and DT’s form then PB may well be ending. If it plows through the gap, closing it, and keeps going then likely a reversal is happening OR price is morphing from a broad bear bear channel into a sideways range.
Compare all this above to strong BO’s and spikes. In the latter, one side is pushing hard and winning on subsequent bars.
You may want to print this out and study it. Then maybe practice it on a sim.
To average down I like to employ the tactic within certain contexts. For instance, in bear channels I prefer my averaging down to be in the top 1/2 or 1/3 of the channel. And I prefer to not employ averaging down in the bottom 1/2 of bear channels. Although sometimes I will if feeling real giddy and in a risk on mood.
Now in sideways RANGES I will average in on both sides.
One more word about bear channels. I look at them as bull flags (on a larger TF) with a likely eventual BO north so when averaging in on the top side I keep that in mind and if my averaged down position gets caught in a successful BO (a BO with FT) I am dumping it then doubling up and going in the BO direction thus getting my loss back in a much smaller move and often get a good profit too.
Again, just think through this stuff and reverse the process in a broad bull channel.
In a sideways move i.e. A RANGE the BO has about a 50% chance it can happen in either direction (the longer the range goes on after 20 bars) but the larger context can skew that in favor to one side or the other and the pressure shown by the individual bars within the range itself can tilt it, some, to one side or the other, in terms of the BO.
