Tell me why averaging down is a bad idea .

[CALLumbus]

In my case, I would not call it "averaging down", but "scaling into a position" or "building a position".
It is simple, no rocket science. Price falls, crowd wants to get out, I buy. Price falls more, seems like panic I buy more, offering liquidity. Usually very soon price reverts at least a bit, I sell my position to the trapped shorts, again offering liquidity to the shortterm burst to the upside. I do all this on a very short timeframe, usually within seconds. Once in a while, the market keeps running against me and I have to liquidate my full position for a loss, but as long as your total losses for a week or month are smaller than the gains it is all ok. You can not win all the time.

It is the same old game, every day. Buy low, sell high. Could also do it without "scaling in", but most of the time I prefer to enter in portions, works better for me.
The edge is not in averaging down, scaling in, pyramiding or other stuff like that. You still have to be good with your timing, you have to know/ feel when to enter and exit. You learn this by experience, time in the market. Hard work.

 

[They]

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.

https://www.elitetrader.com/et/threads/i-would-like-to-discuss-averaging-down.248511/

 

[They]

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.

https://www.elitetrader.com/et/threads/grinding-it-out-day-after-day.187730/

 

[MKTrader]

I've seen quite a few systems like this work amazingly in backtesting and pretty well in real-time for a few years..until we have a 20%+ (or worse) crash or a period where the market goes down for 10-15 straight days (or on 80-90% of those days). Trust me...leverage will eat your lunch in those situations.

The only way this makes sense is if you have a retirement account with some extra cash and do this to buy long-term, non-leveraged, buy-and-hold stocks/funds....but that only works if you're lucky enough to open such an account right before a crash. People who wait for a correction usually sit through multiple double-digit gain years waiting for a "buying opportunity." They're better off investing right away or dollar-cost averaging for 6-12 months until they've made all their purchases.

 

[LS1Z28]

Scaling into a position with a defined stop isn't necessarily a bad thing, but adding to a losing trade in hopes that it will turn around is really stupid.

 

[joker542]

Scaling into a position with a defined stop isn't necessarily a bad thing, but adding to a losing trade in hopes that it will turn around is really stupid.

and I am not adding to losing trades. What I am thinking is to enter small then add position to my trade (but I only add position if my stop loss is not hit).and wait for reversals to play out.

 

[joker542]

I've seen quite a few systems like this work amazingly in backtesting and pretty well in real-time for a few years..until we have a 20%+ (or worse) crash or a period where the market goes down for 10-15 straight days (or on 80-90% of those days). Trust me...leverage will eat your lunch in those situations.

The only way this makes sense is if you have a retirement account with some extra cash and do this to buy long-term, non-leveraged, buy-and-hold stocks/funds....but that only works if you're lucky enough to open such an account right before a crash. People who wait for a correction usually sit through multiple double-digit gain years waiting for a "buying opportunity." They're better off investing right away or dollar-cost averaging for 6-12 months until they've made all their purchases.

that's why I have stop loss placed . and if my stop loss is not hit and price is against me than I add to my position . and in case my stop loss is hit , I am out of the trade.

 

[Amahrix]

Search: Kelly Criterion.

 

[AAAintheBeltway]

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).

That is exactly why I said for buy and hold investments, you are better off to add to winning trades. Doubling down is a trader's tactic to get out whole, not an investment strategy. If you're buying size, there is nothing wrong with scaling into a position, but each add is really another independent trade that adds risk.

 

[MKTrader]

that's why I have stop loss placed . and if my stop loss is not hit and price is against me than I add to my position . and in case my stop loss is hit , I am out of the trade.

That's fine. I still doubt there's any edge in the strategy...at least in real time.