the myth of averaging down for traders

[deaddog]

How about a more nuts and bolts example…Lets say that you calculate support at some important MA, area of trendline support,etc, but the underlying is beginning to catch a bid, so you determine that you will put half of your position on here and then reserve the other half just in case there is a flush down to your ultimate area of support…technically, this would be an “adding to losers” scenario, but practically its a means to gain exposure in an “area” of support where other traders are probably also stalking bids, but the “algo’s” or whomever else is going to front run the buying and the ultimate support area may never be tested before it embarks on a significant move higher…this literally happens each and every week (and vice versa on the short side)

In your example you don't mention a stop.

 

[semperfrosty]

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.

Agree,and I did mention that the buy side wasnt the end of the challenge,but to present the other side of the argument you can see how it saved him missing the trade altogether.

 

[hipster ned]

In your example you don't mention a stop.

Ok, let’s go back to last week and ES down to 4100…Personally, I thought it was possibly going to flush down to perhaps lower 4090’s (it was a fast market and trapped a bunch on the run above 4170), so in that example, trader’s discretion where they feel the invalidation point of a pullback into a widely recognized area of support (daily/weekly, etc).

FWIW, I’m not trying to persuade people into scaling/averaging down, etc…merely illustrating that in practical terms in markets that are far more “reflexive” (i.e. waterfall declines and squeezes), it might be near impossible to nail the perfect entry to the tick, but within a range it might be more plausible…(and again, this presumes that one has a certain level of experience to identify areas of support and resistance)

 

[hipster ned]

Agree,and I did mention that the buy side wasnt the end of the challenge,but to present the other side of the argument you can see how it saved him missing the trade altogether.

Some other considerations…end of quarter/end of year/beginning of quarter/beginning of year positioning…(hindsight of course, but so are many discussions on here), but the upside squeezes in many of the beaten down names did ultimately provide windfall gains on the upside

 

[easymon1]

Ok, let’s go back to last week and ES down to 4100…Personally, I thought it was possibly going to flush down to perhaps lower 4090’s (it was a fast market and trapped a bunch on the run above 4170), so in that example, trader’s discretion where they feel the invalidation point of a pullback into a widely recognized area of support (daily/weekly, etc).

FWIW, I’m not trying to persuade people into scaling/averaging down, etc…merely illustrating that in practical terms in markets that are far more “reflexive” (i.e. waterfall declines and squeezes), it might be near impossible to nail the perfect entry to the tick, but within a range it might be more plausible…(and again, this presumes that one has a certain level of experience to identify areas of support and resistance)

What timeframe charts do you consult before entering a trade like that?

 

[KCalhoun]

The problem with averaging down is that they can go down Much further than you thought they would.

Like tsla from my 800 top call to here

 

[hipster ned]

 

[hipster ned]

First touch is always stronger, second touch is a wildcard to some extent (dependent on trend strength and duration), but still its an area of strong support…so to answer the question, daily hourly for major areas (weekly at times as well)…certainly SPY could be included considering the proliferation of 0 dte options activity around major strikes

 

[hipster ned]

The problem with averaging down is that they can go down Much further than you thought they would.

Like tsla from my 800 top call to here

Not discussing averaging down waterfall declines…I’m attempting to differentiate between hail mary averaging bad trades and scaling into support/resistance areas…unfortunately, the two have been hopelessly conflated

 

[deaddog]

Ok, let’s go back to last week and ES down to 4100…Personally, I thought it was possibly going to flush down to perhaps lower 4090’s (it was a fast market and trapped a bunch on the run above 4170), so in that example, trader’s discretion where they feel the invalidation point of a pullback into a widely recognized area of support (daily/weekly, etc).

FWIW, I’m not trying to persuade people into scaling/averaging down, etc…merely illustrating that in practical terms in markets that are far more “reflexive” (i.e. waterfall declines and squeezes), it might be near impossible to nail the perfect entry to the tick, but within a range it might be more plausible…(and again, this presumes that one has a certain level of experience to identify areas of support and resistance)

Again no mention of a stop.
I can see scaling into a position by taking a partial position to ensure you don't miss the move, but at what point do you exit if you are wrong? Do you set a price where you will close the position as it moves against you?