Tell me why averaging down is a bad idea .

[tommcginnis]

Ok here my trading system outline,
look for potential reversals . wait for it to go into oversold zone.
keep adding similar positions in oversold zones like 3-4 times max. Then for the last position added , put stop loss of like (.3)-(.5 )%. and if stop loss is hit then probably I am wrong about reversal and I get out of trade.

Your description is unclear; your set-up seems short-term (non-investment) biased, and possibly going long at 'local' bottoms, and "adding to" these positions, unless it continues downward .3%-.5%.

The thing is, if you've put on 3 positions, and the thing continues down another 0.3333%, your net liq. would drop as if a single position had dropped 1.00% -- would that be a reasonable SL point for you? If yes, then you're being consistent w/r/t a fixed dollar loss, and "Yay, team!" If you'd put on 5 positions, would you drop the SL distance to 0.20%? Yes? Yes? Well, there you go.

FWIW, people would be less riled if you had used the phrase "averaging-in" or "averaging-out" -- they comprehend taking a stake in something over time, as opposed to "averaging-down" to solve a trade issue: that tends to be a recipe for disaster, as (everyone?) has noted. So, if this is consistent with your already-thought-out investment plan, then Good On Ya. But if this is a way to respond to an unexpected market move on a single trade, then "Run, Billy! Runnnnnn!"

 

[MrMuppet]

Jajaja...there are a lot of truisms around averaging down. It's not that simle tho. If you trade a market that is mean reverting, you HAVE to average down.

Anti Martingale MM in markets like vol or certain spreads is the sure way to ruin.

If you average down your short position in a low floating penny stock...good luck, buddy

So the correct answer is as always: depends...

 

[Handle123]

I average down on all timeframes, took my 15 years to figure out how, and I never ever recommend to anyone to do so as I know most unwilling to test as I do. The most risk is on intra-day trading, cause from 30 minutes and higher I hedge all positions, much much less risk. For intraday you absolutely require to have loses under 4%, this is not to say you are winning 96% on original entries, you are basically aiming for breakeven signals on original entry, so think in terms of entry being the "mean", as price goes away you adding on waiting for the spring back, and HFT's actually do me a favor as most only going for small profits, but turns into complex system having to use elements of speed of price in seconds and slopes of price and must be completed in so much time. Jim Rogers said it best long ago on long term trading, he said he generally gets in early 2 years early, so in a way I get in early. But there are times where I get 2-5 ticks and no ave down entry's.

But being a scalper first is different than being a day trader, I do have runners, but 0-4 a day work out well being runners, today being a day where having 10% of position is actually making more than few ticks.

My very worst days in my life been when I get 3 losing trades in a row, I use to add on 8 levels of same size, and it take me 2-3 months to recover, now cause I am shifting funds to more swinging stocks and options trading, I ave down or add on 4 levels, and in automation loses don't ruin my day. Accumulate enough in one's 401k for lifetime, equity curve a way to keep score. Over long haul I do well by doing so, but unless you have beyond expert skills, you will end up bankrupt.

My testing is 15 years of tick data for intraday and 25-50 years for longer term, most of that can be broken down into tick data/one/five minutes as well. I know I do overkill, but I like stats, want to know how worst can it get and always knowing this be exceeded.

It be best if you take a long walk and forget averaging down, learn to add with the trade.

 

[volpri]

Well I disagree with most traders on this. It can be profitable but has to be done in the right context. In a range adding long in bottom third can be a profitable tactic. Adding more as it moves against me then waiting for a reversal back up towards the middle or top of the range.

 

[joker542]

You'll likely get away with this strategy most of the time, but the question is... How much do you lose when you get down to your "throw in the towel stop"?

There is a famous picture of Paul Tudor Jones's office wall with a framed post, "Losers average into losers".

Suggest you learn about "Price TA". That way you won't be tempted to "average in" on large market moves against you.

Said another way... If I were looking for a money manager and one told me his strategy was to "average down", I wouldn't hire him.

FWIW....

Ok actually it's not averaging down it's like having a bigger stop loss , since I am predicting a reversal in near term. So until trend reverse I add to my position , but it's not like I am adding position forever , it's max 4 times then on that 4th position 8 have a strict stop loss , and if price goes below that I am out of trade. With loss . But if I am right then probably I have bigger profit.

 

[joker542]

Just remember - always prepare for the unexpected...

------------------------------

"The cash-strapped Wall Street investment bank Bear Stearns was rescued from the brink of collapse tonight through a takeover by rival JP Morgan Chase for the rock-bottom price of $236m.

After a weekend of frenetic negotiations, Bear Stearns' board approved a stock-for-stock buyout at a valuation of just $2 per share. In a sign of the desperation of Bear Stearns' plight, the deal is at a 94% discount to the bank's closing share price of $30 on Friday night."

https://www.theguardian.com/business/2008/mar/16/creditcrunch.useconomy3

I have stoploss it's just a bigger stop loss like 4-5% but until stock moves 5% against me . I am adding to my position , so that if I am right I have more profit , and I have more room for my strategy to play out.

 

[joker542]

T

Well I disagree with most traders on this. It can be profitable but has to be done in the right context. In a range adding long in bottom third can be a profitable tactic. Adding more as it moves against me then waiting for a reversal back up towards the middle or top of the range.

That's exactly what I am trying to do . So if there is any news I am out . If it goes against me like 5% I am out , and also since I have added to my position when it moved against me , my average loss is around 2.5-3%.

 

[MarkBrown]

i will add if i am trading reversion to the mean up to three re-entries. if i am adding to a trend i will only look for one more additional re-entry. if you know your system well it can more than double your profitability from a base model that is just fair.

 

[AAAintheBeltway]

And it certainly won't work today. In most cases, it is suicide to even try it with futures.

Really?

 

[joker542]

You left out two key factors, your time frame and what you're trading.

I don't have a problem doing this intraday with stock indexes or something like bonds, FX or even oil. They tend to mean revert during the day at some point unless you are dealing with a one way runner type day, in which case you are screwed. I wouldn't do it with something like an ag commodity where you can get limit locked. Individual stocks can be tricky, as they have a tendency to close at extremes if news is involved.

I also wouldn't do it on a longer term position. The reason is you are likely to be dealing with a more serious problem than just some intraday over run. You are much better off pyramiding into winners.

The key with an intraday double- or triple-up is to give it room to move before adding. You want to make your last add very close to your stop, so that you are not risking much on it. The real key to this technique however is you must be able to kick out the whole position if that stop level is broken. The market is telling you that you're wrong, so eat it.

The other key factor is exiting. It's tempting to want to hang on if it reverses because you have a good cost basis at that point. But markets that go down hard then close at the highs are rare events. I think the safer approach is to exit the whole thing if you get past break even. It's mainly a technique for turning losses into small winners.

Your description is unclear; your set-up seems short-term (non-investment) biased, and possibly going long at 'local' bottoms, and "adding to" these positions, unless it continues downward .3%-.5%.

The thing is, if you've put on 3 positions, and the thing continues down another 0.3333%, your net liq. would drop as if a single position had dropped 1.00% -- would that be a reasonable SL point for you? If yes, then you're being consistent w/r/t a fixed dollar loss, and "Yay, team!" If you'd put on 5 positions, would you drop the SL distance to 0.20%? Yes? Yes? Well, there you go.

FWIW, people would be less riled if you had used the phrase "averaging-in" or "averaging-out" -- they comprehend taking a stake in something over time, as opposed to "averaging-down" to solve a trade issue: that tends to be a recipe for disaster, as (everyone?) has noted. So, if this is consistent with your already-thought-out investment plan, then Good On Ya. But if this is a way to respond to an unexpected market move on a single trade, then "Run, Billy! Runnnnnn!"

From all replies it's now clear to me that , my description was not clear.