Ok I am back from town running errands. First thing I see standing out to me on the chart is I missed the move down to the bottom of the range (red arrow). I had to run errands so I just exited my 6 contract “averaged in” position at the green triangle. At any rate my position was exited with a profit on all 6 contracts. Had I been able to have been here I most likely would have held and captured a good amount of that down move thus making a handsome multipoint scalp. I wanted to show how I averaged down successfully and could not just leave the trade on as I went to town as it could have just as easily gone back up and in such a case I would not have had a closed trade to show you guys. At any rate my exit was profitable and that is the example I wanted to show. However, the move down afterwards does illustrate just “how” profitable the process can be.
Just to summarize today. It is imperative to look at larger TF’s BEFORE the RTH’s open to get a feel of who is winning overnight in the markets, bears or bulls. So, just before the open we looked at daily chart. It was bearish = weakness. Then 60 min overnight chart channel down = weakness. Then 15 min overnight chart is channel down = weakness. Then 5 minute overnight chart = channel down = weakness. Finally we look at RTH’s 5 min chart = price gaps down=weakness on the open (see red gap on this chart below) and price begins a sideways move that by 9:30 a.m. central could not still be called a range for it needs to have at least 20 bars to label it a range. But price is not going anywhere and confusion reigns. Confusion usually means RANGE. WITH ALL this weakness, on all these time frames, averaging down on the short side is safer at the moment (9:30). So we wait for 20 bars sideways. We get it so we are now in a range. Range means short at top and cover on moves back towards the middle or bottom (and ok to “average in” if the larger contexts supports it, and it did in this case). Range also means go long low and exit on moves back towards the middle or top of the range (and Ok to average down long if the immediate context overrides larger context (i.e. 50 ..60..or more bars sideways renders a 50/50 any BO of any range can go in direction.) In this case 57 bars into the range and we are at the bottom after red arrow drop. So, an opportunity did present itself to go long at the bottom of thebrange and even average in there. See blue circle.
Now what happened? Well by that 20th bar from the open we have an established range. The larger context (different TF’s) all indicate weakness. The immediate context (5 min RTH) indicates weakness with gap down open. And the immediate context shows that by 10:10 a.m. price is now in a range however it has been hugging the upper top of the range last 10 bars or so. Now the basic idea or concept is to begin shorting and averaging in near the top of the range. However, since price has been hugging top of the range I want to see some immediate weakness before I start shorting. I want the immediate context to show me some weakness that lines up with all those larger contexts. But instead we get a BO of the range on the top end around 10:25. The low’s of next 4 bars stay above the BO point and a BO gap (grey box) forms and has not completely closed. However PA is also showing me that the 10:25 BO has little FT and has a bar with a good sized tail on top. So I am just waiting to see if price goes back into the channel. It does so on that larger bear bar (28th bar from the open) and that is the weakness I am waiting for. The bulls will likely push back as they have kept price hugging the top of the range and they want a bull BO that closes the opening gap of 8:30 a.m. But I know bears are pushing too because of that larger bear bar and the previous bar with tail on top and in addition we now we have a failed BO as price is back in the range. So, by the close of that bear bar the odds are higher that price will sometime during the session go back into the range enough for a profit. So, I am now convinced to start shorting and averaging down as bulls push back against that bear bar. Plus further weakness is confirmed as we have three bear bars in sequence (two others before that 28th bear bar) AND bears forced price below the 50 SMA AND the 20 EMA on those three bear bars just before my initial entry.
So, I start shorting ..and get my 6 lot position all averaged 6 bars later and set my stop above 3342 which will be above the high of the day and just wait for the likely drop. Larger contexts all confirm weakness and now the immediate context also confirms weakness. The area where I averaged down was just bulls pushing back against those 3 bear bars and their push will likely fail because that previous bar with the tail on top indicates sellers are probably right there. So, I am good to average down. Once I have my “ position on” the goal is to exit it, if possible, with a profit on all the contracts. I did so. Unfortunately, I had to leave and so closed my position out and entirely missed the larger move down.
So, there you have it. How to average down when the CONTEXTS (plural) favor doing so. Starting at RTH’s open the odds favored shorting and averaging down on the short side. Late in the session averaging down was feasible from the long side as the range was prolonged more than 50 bars.
Now considering all the larger contexts lets say price in the immediate RTH’s chart was not a range but was instead a BEAR TREND from the open. What would you do? What would I do? I would be averaging down short on every bull PB and covering lower as the bear trend continued. The larger contexts and the immediate context supports employing such tactics. If a PB became larger 20 bars or more I would no longer consider it a PB but a range and would trade it as such. Or if a reversal took place in the bear trend I would abandon the shorting averaging down tactic and start using reversal tactics. Something I have not yet discussed in this journal.
Ok lets say all the larger contexts showed strength and the immediate (5 min RTH) context showed a range. Where would you consider employing averaging down techniques at the bottom or at the top of the range? What if the immediate context was a bull channel from the open with and opening gap. How would you employ averaging down? Print all these charts out from today and study them thinking through my posts and I am sure you will know what to do as concerns averaging down in weakness or in strength.
Finally, remember the goal for averaging down is not to rescue a losing trade but it is to add to a losing trade thereby getting in at BETTER prices and create an opportunity to make MORE money based upon a trade entry premise that has it’s foundation in contexts larger..and immediate. However, as a by product you will many times rescue a losing trade and an in addition an added benefit can be a high win rate which is a great psychological booster and just makes a trader feel good about his judgement and decisions. It is great to end the day on a positive note and ahead moneywise.
Never average down to just be attempting to get out of a loss. That is a losing strategy in the long run. Because one day you will average down to bankruptcy. Any averaging down must be done with sound principles and be based upon a premise. Even then you can be wrong at least 40% of the time so a trader also needs an exit strategy when he is wrong and a recovery strategy to promptly get back his loss he incurred by dumping an averaged in position. And he needs to recover the same trading session if possible. That usually mean some sort of doubling or tripling up in the right direction after taking a hit on an averaged down position.
A last note: It is best to not average down in the last hour or so as you may not have enough time left in the session to get out with a profit. Best to average down between 8:30 a.m. and 1:00 p.m.
Hope this helps somebody in their trading on a sim LOL. Study the concepts well and practice over and over on sim. Disclaimer: I ain’t advising anyone to do this with real money. That is totally your choice. Be aware you can lose all your money and maybe your hat and pants trading futures.
It is alot of work to type this stuff up AND ESPECIALLY to make snapshots and live comentaries and post charts live AS the market unfolds, like I did today. I hope you guys find it interesting and appreciate it. I am getting old. 65 next month. It takes me a long time to type all those thoughts out that are in my head. Enjoy!
