the myth of averaging down for traders

[semperfrosty]

What is there not to get? A short term trader who is bullish or bearish on a trade cannot assume a perfect entry, so they enter a long or short inside of a range with a fail safe stop loss outside of the noise range…but if you become too literal with your definition of averaging losers, you will fail to understand that buying or selling on a scale inside of a range can increase your edge…

I think this is a good analogy and it can be seen in action in the Tesla thread.

The OP's trade idea was to buy at $100 in a falling market,Tesla stopped at $101(for example,not exactly sure)and proceeded to increase.

OP stuck to his management rules and did not 'chase' the upward move.

Averaging in from say $103 down would have allowed him to benefit from the market direction which he correctly called without having to pinpoint an entry.

Admittedly,it opens up a mine field of other considerations should the market turn but I agree with Ned that it could lend to your edge.

 

[Ivano]

Admittedly,it opens up a mine field of other considerations should the market turn but I agree with Ned that it could lend to your edge.

Simplifying:
Before this post did not know about discretionary trading, thanks @Snuskpelle
If one is truly expert as a trader, disciplined, does the risk math, can afford "listening" discretionary to the market, as per Livermore, letting the price speak(today not only that..) :
A) because can be part of his system
or
B) because there are some exceptional circumstances that make him deviate from the setup golden rules

Example:
the current $OXY bottom 4 days ago!
he knew Mr Omaha was sustaining him more than gravity forces of the earth in the solar system,
he knew his ADR, ATR, Beta, IV, risk propensity model and market conditions, his macroeconomics insights on oil and inflation,
and swinging for one week adding down, lowering the break even point, would have been statistically interesting for an important 3-5m account

 

[Snuskpelle]

Let’s make this simple…for those without ability or experience…”averaging down” = financial death…for those with some strategy and ability, it’s part of the game…

defining terminology is critical to discussion…ask spooz top about averaging down…for some its scaling in, which would infuriate the masses on here who believe thats against all of the rules

"The masses" are entirely right in avoiding it. With sufficient experience you know if you're able to do it, but it's super easy to fool yourself to succumb to the good old 'trading win probability for large losses' game. Unless it's a well defined backtested mean reversion strategy, or perhaps where you're sure about something (e.g. stock specific) that the market missed and you have a small enough position that is safe to add to, I wouldn't bother.

 

[Snuskpelle]

Averaging in from say $103 down would have allowed him to benefit from the market direction which he correctly called without having to pinpoint an entry.

One sample? Increasing the win probability and loss size is literally what averaging down is guaranteed to do. There are lots of coulds in trading.

Arguably a more reasonable thing to do is not have a BS tight stop that throws you out of your thesis.

 

[SunTrader]

What if ... the buy TSLA @ $100 failed? And TSLA kept on dropping. Keep on buying lower and lower?

At some point averaging down becomes just losing more.

Investing, just like trading, is first and foremost about protecting capital.

 

[ElCubano]

What if ... the buy TSLA @ $100 failed? And TSLA kept on dropping. Keep on buying lower and lower?

At some point averaging down becomes just losing more.

Investing, just like trading, is first and foremost about protecting capital.

at some point to take large amounts of money out of the market you have to lean with conviction. I know I know but it doesn’t change what I’m saying.

 

[SunTrader]

at some point to take large amounts of money out of the market you have to lean with conviction. I know I know but it doesn’t change what I’m saying.

Lean, not tilt.

Not like running in football the wrong way for a touchdown, a player once did.

 

[rparmar70]

In my 10 years of trading experience, mainly day/swing trading ES/NQ, I have learnt first hand that both averaging and trading without stops will eventually lead to ruin! But if I have to rank which one is worse, it's indeed averaging! Weeks/months of hard earned money can vanish in one trade using averaging. Plain stupid! Because averaging has a high win rate due to the randomness of the market, it gives you a false impression that it works. Trading without stops may still be OK if at some point (end of the day/week) you close but not ideal. And yes, tight stops are bad too.

 

[Tradess0610]

I would not advise averaging in trading.

It is a different thing when we talk about investing in stocks. If you see a stock has had a bad quarter but otherwise the investment thesis remained strong, then you can buy some more when it dips. Same applies to mutual funds, etc.

But in daytrading - hell no. For all the reasons the guys said above.

 

[Mark Lapin]

There is nothing averaging down. Think of it this way, if you can buy a $20 dollars at $15 would you? And if you can buy a $20 for $10 would you buy again?