It might work, but the math is against you, because you will have a max position for every stop-out, but many (most?) of your winners will be less than max positions. This creates the need for exceptionally high win rates (net of commissions/slippage).
Tell me why averaging down is a bad idea .
- Thread starter joker542
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It might work, but the math is against you, because you will have a max position for every stop-out, but many (most?) of your winners will be less than max positions. This creates the need for exceptionally high win rates (net of commissions/slippage).
I take short term positions. And I have strict stop loss , but it's a little bigger.So until that stoploss is hit , I add to those positions , so that if I am wrong overall I have loss of around 2-3% . And if I am right I have bigger profit , and overall my risk reward from my 1st position is atleast 1:2 and some times 1:3.
The only situation when averaging down could be profitable if it is required by strategy rules. There are some strategies based on average daily movements of some particular instruments based on calculations. For example, if you know that the average range is 1% and maximum is 2%, you can buy/sell near the border of this range and average down till the price reaches 2%. Then you will need to close your position.
Using this approach you may define your stop and risk per trade before entering the position. Another important point that using this strategy you need to pay attention to news because news could cause trend movement that would lead to huge losses. Thus, this strategy is great for low-volatile instruments moving inside thier range for a long periond of time. By the way, if the general volatility on the market would increase, the volatility of each instrument may increase too, so you would have to update your calculations.
Using this approach you may define your stop and risk per trade before entering the position. Another important point that using this strategy you need to pay attention to news because news could cause trend movement that would lead to huge losses. Thus, this strategy is great for low-volatile instruments moving inside thier range for a long periond of time. By the way, if the general volatility on the market would increase, the volatility of each instrument may increase too, so you would have to update your calculations.
Well most of the time my initial risk reward is 1:2, and some Times 1:3. And since it's kind of mean reverting strategy . I need to have a little bigger stop loss , so if I add to my position when it goes against me I am lossing less on that trade. If I am wrong on that trade. And increasing my profit if I am right.
If I understand your post correctly, I would be very cautious with this approach. I am assuming you mean the stock is down near support or a moving support and "nowhere to go but up". You expect it to regress toward the mean and possibly climb above it to a resistance, so you bet out with a long position without confirmation by a bull candle. Then it doesn't rise or maybe it even drops a bit more, so you throw more money in the pot because now you are getting the stock cheaper. And again. And again. Then the stock maybe hits your stop and you take your loss, or else it reverses as you predicted. Me, I don't like it. I prefer to see a confirmation of reversal and then take a position appropriate in size to my account status and the short term average volume. Then I know I have a better chance of the trade going my way, and MAYBE I will scale out on the way up, where I expect resistance, and if the volume is good and there is good spread on the candle, I might wait and see if the stock will break out, in which case I will keep my half position as long as it is making more money. If not, then I close out the position and yeah, maybe take a slight downslide from the top, but possibly still above the point where I figured to bail.
Averaging down in my view is a flawed strategy. I think overall you are better off switching to 1m candles at the bottom of the range, and watch for a confirmation with volume and price action in agreement, and then bet out strong with a stop below resistance, which is then moved up when there is at least one good solid candle above the break even. and bull volume is still strong. I think in the long run it makes more money than averaging down. Confirmation. That will improve your batting average enough to make a difference in your P/L at the end of the day.
Keep in mind that when you have averaged down say 3 times, those first three buy orders you paid too much. You didn't wait until you had reversal. If not a bull candle, then at least a nice hammer doji. Maybe this... buy when the downward micro trend is in indecision, stalled out. Then buy more at the first bull candle that shows strong volume. Don't you think that is a better way to scale in? You are still buying initially in a dubious setup but one where the price potentially is at bottom, and then you are increasing your position when it is a little more certain, even though you may be a few cents late to the picnic.
Another thing about scaling in while the trade is still trending against you. If you stop out, then the first buy-in loses more money than the last, which you based your stop loss on. So again, you actually overpaid for the stock and have to pay for that mistake when you are finally stopped out.
Just my opinion. Take it for what it's worth. I have never averaged down in live trading. Tried it in paper trading and I was not thrilled by my returns. If I read it wrong and I buy at the low and it turns out that wasn't the low at all and it declines some more, I go ahead and sell and take that tiny loss for my mistake. Maybe it will go back up, but maybe down still further. I would rather wait and buy when there is confirmation.
Maybe that's being timid. Maybe that is just being careful. Call it like you see it. You got to trade the way you see fit.
averaging down, averaging up, martingale, anti martingale.... all these things give no statistical advantages or disadvantages by themselves... otherwise everybody would be millionaire by now.
I've said many times - trading is not about 'finding an edge that's sitting there for you to discover', an edge somehow has been missed by millions of traders and computers that have done millions of back tests already.
The only winning factor is YOU the trader, YOU have to read the market better than others... check my thread 'trading is easy'... trading is about unfolding stories.... stories that are always somewhat similar, but are never the same.
I've said many times - trading is not about 'finding an edge that's sitting there for you to discover', an edge somehow has been missed by millions of traders and computers that have done millions of back tests already.
The only winning factor is YOU the trader, YOU have to read the market better than others... check my thread 'trading is easy'... trading is about unfolding stories.... stories that are always somewhat similar, but are never the same.
I was just trying to find if there is any flaw with my system since , you always feel like you are right until you find what's wrong . So was just confirming if there was any fundamental flaw which I didn't notice.
so my answer was this is a non-factor, if you average down 1 time or 7 times, at the end of the day it's still a directional trade - YOU reading the market as going up, down or side ways.
if you read the direction correctly, you make money.... that's it.
average down or now;
stop loss or not;
mental toughness or not;
discipline or not;
keeping a trading log or not;
hedging or not;
these things affect your account balance as much as the weather does.
I like to take trade only if I get confirmation , but I don't usually use support/resistance level , I look for fading trends , like slowing momentum, volume is diverging from price ,but price goes on to make higher levels (almost like being overbought/oversold) then I take trade. So I have to keep room for trade to reverse , so little wider stop loss so that I am not out of my position from whipshaws or a final higher high. Even with my initial entery my risk reward is 1:2.
And now this is what I am trying to add to my system , take smaller position then add on to position.
dude you really just need home work at this point lol.... and I can give you the answer right now...
re-entry or not
1:2 or 1:5
phase in or all in
narrow or wider stop loss
these things all affect your trading account as much as the weather does.