I have read through this entire thread and would like to say that i average in nearly every trade and the two things mentioned by other members that strike me as the most true are this:
(1)
BINGO! My strategy is to short stocks that have been pumped heavily on no news or mediocre news...after my initial entry the price nearly always goes against me (higher) but I literally win 9/10 trades by holding them until the hype wears off adding to my position at points of resistance. The problem is exactly what is mentioned above and more...that 1 out of 10 loss is a MAJOR loss and can offset the 9 wins that are usually not home runs. Another issue is that it ALWAYS takes more time to turn around than expected...time I have my money wrapped up in a losing position bag holding. I started this adventure thinking i would be a day trader and get forced into swing trader status because of this "strategy".
(2)
Loss aversion and gambling is exactly right. I am inexperienced and i hate to lose. I've tried various strategies like 3 bar play, stop loss reentry, etc...and I lost every time...And it hurt every time getting Stopped out instantly. And i know the problem is with my lack of experience choosing the wrong entry point. So i started doing the method above (short pumped equities) and it felt good to "win" so I've kept doing it. I spend a lot of time every day educating myself but for the time being i am going to offset my lack of skill with averaging in. I know this isnt long term sustainable...holding short positions in highly volatile companies for up to 2 weeks is a nightmare waiting to happen and i am working on other methods every day. Just thought i would provide the thread with a prime example of averaging in the wrong way.
Averaging down in every and any circumstance is most definitely a critical mistake. The context must be right for it. I enter my trades with a premise formed that I base on present and past PA. I don’t just average down because I am losing and hoping to stop the loss and make myself whole. Sometimes it is better to just exit a trade flat out ..take the loss...then enter again in another opportunity.
I average down
to increase the probability of the trade resulting in a successful trade. And this can be done often in the right context (very often) intraday on a 5 minute chart of the ES. Why? Because of the mean reversion tendency of the ES over and over all day long. Thus I employ this technique. But I must do so when it fits the context of PA.
Second, averaging down or scaling into a losing position if PA appears to supports it then I am
increasing my profit when it goes my way because I am getting it cheaper.
The key here especially for scalping is not to get
greedy. I take my profits when the market gives them to me.
Third if I judged
wrong then I exit out out of all averaged down positions and look for an opportunity to double or triple up in the new direction. Then I get back my loss in 1/2 or less, in movement.
I know some will say well the fact that you averaged down means you were wrong from the start. I beg to differ. I can be right on the move and early on my entry. Why should I take a loss on an early entry by dumping it when my premise for the move is still intact? No. I will add until my premise proves to be wrong. It isn’t a matter of not accepting a loss, but it is a matter of increasing the probability that the trade will end up being a successful trade.
Remember it is extremely difficult to enter at the right tick just when a move will go my way with any adverse movement first taking place. So the question becomes what will i do in adverse movement? There are other applicable concepts to averaging down but these are a few.
