Tell me why averaging down is a bad idea .

silvercoin said:
We are limited by our beliefs and the mechanisms we create to support those beliefs.

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To supplement your point, we are also limited by the size of our trading account. If you average down at just the wrong time, you can suffer a huge loss. Averaging up holds the same peril. You scale into your winner, as it goes up and up, and quickly your gains turn into a BE, or loss.

All these ideas are 100% symmetrical in nature.
 
There is a time and place for averaging down and it helps if you have deep enough pockets to absorb risk. There are pros and cons to everything. The pros are you could build a position and lower your cost basis thus keeping the market close and all you need is a little move once it turns in your favor. However, the cons are, psychologically negative because you are adding to a loser and if market keeps going against you it's now with a bigger position and you could get wiped out in near time if pockets are not deep and market does not turn for you in time.
 
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There are many other stories about companies and funds which failed just because their managers were unable to agree that they are wrong and to close their losing position. These stories are quite important for newbie traders believing that aeraging down is a great approach to trading. If the professionals with exceptional experience and huge financial capabilities failed doing this, so how could an average trader stay in the position longer?
For sure, sometimes it works. In particular, it could be profitable in the following situations:
- in the instruments moving inside the tight range unless the new trend appears,
- in some particular stocks with great fundamentals decreasing due to the general market situation,
- in case you just buy the market (ETFs) from time to time during a several years.
Another situations when trader tries to turn his losing position into profitable would mostly lead to greater losses.
 
Im considering averaging down using the following algorithmic strategic steps/convolutions: take position modulus(longs -shorts) then add one. if she go half this distance but in money up way trade, if another way but in whole distance trade. so she has position of -3, iff UP 4 sell (now she has -4), iff DOWN 2 buy (now she has -2) . she hits a winner twice as often.
 
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kellys said:
Look, i get it! We've all been there. Making loads of money averaging down.
The reason why most average down is because it pays them, for a time that is.
And their logic is, "Hey, I'm making money, I'm right. Averaging down works."

My suggestion would be to forget your belief. Let's be honest, most people have no idea what the hell they are doing.
For those about to get upset, I'm talking statistics. Numbers don't lie!
Hell, half the time I have no idea what I'm doing. But by avoiding averaging down, I can be wrong and see the least amount of damage to my account possible.
Good traders manage risk. Period.

The craziest thing is...averaging down is bloody unnecessary!
You can make massive amounts of money by averaging up and managing risk.

Go and check this thread out:
https://www.elitetrader.com/et/threads/joining-the-cme-gang.334231/
As much as I like Hilmy, he was too busy playing offense and forgot the defense.
I mean how long do you want to be a great trader for, 2 days, a week, a year? We all want to be doing this until we don't.
But we certainly don't want to be forced out prematurely.
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This doesn't really make sense. So, if you're "averaging up" that would mean you have some mathematical edge or advantage that allows you to know when you should average up.....

Yet you're assuming people can't have a mathematical edge or advantage in when knowing the time to average down.

You can't see how this is just logically inconsistent? and at best assuming way too much?
 
4xdev0 said:
There are many other stories about companies and funds which failed just because their managers were unable to agree that they are wrong and to close their losing position. These stories are quite important for newbie traders believing that aeraging down is a great approach to trading. If the professionals with exceptional experience and huge financial capabilities failed doing this, so how could an average trader stay in the position longer?
For sure, sometimes it works. In particular, it could be profitable in the following situations:
- in the instruments moving inside the tight range unless the new trend appears,
- in some particular stocks with great fundamentals decreasing due to the general market situation,
- in case you just buy the market (ETFs) from time to time during a several years.
Another situations when trader tries to turn his losing position into profitable would mostly lead to greater losses.
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I don't understand the "huge financial capabilities argument" Here's why: Even if someone only had 0.01 percent of the capital the fund managers have they could stay in the position when a bigger player couldn't if they averaged down slower, at better spots and/or didn't use so much of their capital that they are at higher risk of blowing up the account.

Also "professionals with exceptional experience" not all fund managers even ones who control a lot of money necessarily have a good market view..... and even if they do, they are still competing against others who may have a much better view.


EDIT: Not trying to really debate for or against averaging down, just genuinely and logically not really understanding the exact reasons given for why to not average down.
 
trdes said:
This doesn't really make sense. So, if you're "averaging up" that would mean you have some mathematical edge or advantage that allows you to know when you should average up.....

Yet you're assuming people can't have a mathematical edge or advantage in when knowing the time to average down.

You can't see how this is just logically inconsistent? and at best assuming way too much?
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What mathematical edge? You don't need one! You're bloody winning mate lol!!!
When you average up your winning! YOU'RE BLOODY WINNING!!! And you're STILL winning AFTER the average!
That means you and the market are in sync.
Simple example:
I get long the ES at 3000 it trades higher to 3010. I add another. I now have an average of 2@3005. I'm winning, still!

I get long at 3000, it trades lower in this case to 2990. I add another. I now have an average of 2@2995. I'm losing, still!

If you have to rely on averaging down to win (adding to losing positions), what sort of edge do you have?

If you reverse engineer a typical blow up then you will be averaging up on a directional move.
In other words, you leverage a market that is paying you.
It's called trading market 'feedback'.
 
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