Tell me why averaging down is a bad idea .

[taowave]

To the OP,
Run a simulation with your chosen strategy.

Now run MAE/MFE reports and look at the MAE trades distributions,looking at scatter plots illustrating profitability at various MAE intervals.Look at the Profit % for given MAE intervals..
If you are a trader and not a dollar cost average Long term investor,it will be abundantly clear why your best chance of success is to not average down...The very best trades and where the probability of being profitable are those trades that have a very small MAE...And its really not style dependent.i.e tend following vs mean reversion..There are exceptions,but I wont share that

 

[Renorail]

Averaging down is great if you have a plan. Don't get me wrong, I hit stops, but that is just it, you have to have stops which is part of your plan. Take range bound markets - why wouldn't you average down when it is highly likely that the peak will be followed by a trough. Ok, so you are wrong that 10th time the trade doesn't go in your direction...take your loss (stop) and move on.

 

[Ilgan]

I think that short term trading with averaging down can be profitable. Certainly, on if you know what are you doing. However, I have never used this kind of trading, as I dont feel quite confident with it

 

[murray t turtle]

Averaging down is great if you have a plan. Don't get me wrong, I hit stops, but that is just it, you have to have stops which is part of your plan. Take range bound markets - why wouldn't you average down when it is highly likely that the peak will be followed by a trough.
Ok, so you are wrong that 10th time the trade doesn't go in your direction...take your loss (stop) and move on.

%%
OK, that; + lets figure are doing it on something like SPY,QQQ. Average down on something like DAL, AMR, LEH ,BSC.......puts the traders in bankruptcy court- as those stocks were.

Sounds like you have a winning plan. As to why i would not hit my stop, your last paragraph: QQQ even range bound, tends to trend higher=4th quarter+ 1st quarter. I would never average down on trash like TSLA, >> minus - 31.777 YTD, 191% debt, mostly downtrends/ polar bear trends, most time frames.........................................................................................................

 

[interdim]

Probably 20 years ago or maybe even longer I studied variations of this type of strategy and applied them with real money to real time trading. Eventually I came "within inches" of going completely bust. There are much better ways to trade the markets, you don't need to rely on such a strategy.

 

[padutrader]

Averaging down is great if you have a plan. Don't get me wrong, I hit stops, but that is just it, you have to have stops which is part of your plan. Take range bound markets - why wouldn't you average down when it is highly likely that the peak will be followed by a trough. Ok, so you are wrong that 10th time the trade doesn't go in your direction...take your loss (stop) and move on.

yes i trade smaller than tiny and have a wide stop for all trades and keep averaging or scaling
in. but trade tiny