the myth of averaging down for traders

[Ivano]

All the coaches i heard say always a trader should never average down. This is a consideration linked to an important aspect: the risk management!

I listened then a chat with trader podcast interview from a veteran that said:"Do the opposite of what common sense teached, I averaged down a lot"

so let's see this trade scenario, you are wrong to go long on stock XYZ, then goes down, you got stopped out in your hourly timeframe and you lose money or your stop and loss is not touched and the ticks keep going down, you see a positive signal in line with your strategy, you see another one, and another one


Will a wise trader
1) follow the market, is time to buy, and to buy more to average down the loss, there is some statistical edge, you do not want to admit you are revenging trading and you want to go all in.
2) wait for your stop and loss, is common sense to have a mechanical system, and you should not intervene, never! Then journalling will fine tune your strategy

I guess number 2 is the way to go, but there are consistently winning traders that do not care and just follow what market say on the basis of signals going for option 1?

 

[stochastix]

never used a stoploss, learn option spreads

 

[hilmy83]

Using stop loss reduced your edge significantly. It's basically a double entry approach, where each (entry and stop loss level) reduces your overall probability

 

[hilmy83]

I also think averaging down is no good. I havent found any way to make averaging down work for the long run.

You're basically always committed to a direction or you always take the most loss if you ever decide to cut it.

What i found that works is stop and reverse.

 

[rb7]

If you go in one direction and the market decide to go in the opposite direction, you were just wrong.
You have to accept the fact that you were wrong.
Averaging down is not accepting this.

Unless your plan was to do so and you have a good reason.
But usually, averaging down is like "hey, I' wrong, lets keep digging further down".

Also, averaging down is completely the reverse of the popular saying "Cut your losses short and let your winners run".

 

[Ivano]

Unless your plan was to do so and you have a good reason.
But usually, averaging down is like "hey, I' wrong, lets keep digging further down".

yeah indeed, gotta accept, that the plan needs to be thought forehead, and losses are a reason to meditate and move forward

 

[SunTrader]

Common sense ... is often right. Confirmation can be found for any point of view.

But if a trade is going against me, the last thing I want to do is add to my mistake.

 

[speedo]

I know traders who scale in but they have strict management rules and are highly disciplined. It's not something I do and would certainly discourage it for any beginner or developing trader. Scaling into winners in a strong trend is a different thing.

 

[M.T. Valencia]

Money management is more important than the initial price you enter a position at.

 

[ElCubano]

My biggest wins and losses have been by doubling down.