The 30 most costly trading errors
- Thread starter Cutten
- Start date
There's no such thing as "deep pockets", a position's risk is determined in % terms not absolute terms. If Bill Gates had had on a $200 bill long S&P position in 2007, he would be broke by now.
Also, trying to average down a loser, and scaling in, are two different things (at least with the definition I understand). The latter starts small and then builds up to the intended full position size. The former starts at full position size and then goes much bigger than a rational trader would ever trade.
Finally, many big veteran traders have eventually lost everything by averaging down excessively against an outlier move, eventually taking on too much size & risk. If you average as a matter of habit, you are far more likely to do this than if you don't add to losers.
Quote from ElCubano:
if you love it at 20 why not buy double the amount when it hits 10...you are getting a discount...lol
Averaging Down, reversing, hedging working together as part of an overall strategy is what every profitable trader does every day. Just taking a stop and re-entering a new trade with the same instrument is a form of averaging down. All part of money management which is key to living to trade another day.
Just averaging down losing positions without all of the above and a solid money management plan will likely result in a blow out.
Perpetual averaging down is what our government is doing with the deepest of pockets and will likely serve as an example of why perpetual averaging down inevitably fails.
The fundamental problem with this approach is that the trader that adds to losers must have the maximum amount he is willing to lose in mind before the trade even begins. Obviously this amount, must abide to his sound money management.
However, as the trader starts witnessing the drawdown, lack of discipline, attacks the trader and somehow trading the old plan, becomes trading a new plan, and well, then the pain begins and eventually, the monumental loss that wipes you out.
Vastly different, from the intended max amount you were willing to risk before you even placed the trade.