the myth of averaging down for traders

[rparmar70]

Started a swing trading portfolio early last year with no SL & scale in long-only.
Time-frames ... Weekly/Daily
Ended the year in the green but not sure how much.

Key takeaways: (Swing NOT Daytrade)
1-Don't add too quickly. (5-15% between entries) Biggest mistake by martingale traders IMO.
2-Use MANY positions/stocks. I ended the year with ~120. This removes the urge to add too quickly. A few dropping >50% is less painful. I avoid tech.
3-After ___ entries, halt further entries until there's a sign of a bottom. Check recent news to find out why it's falling so much. I like Seeking Alpha and the comments are actually more useful than the articles IMO.
4-I pay very little attention to individual company fundamentals. Too many to follow. Only check when the chart gets a bit ugly.
5-Scale out also. After an entry, place a sell order 5-15% above and a buy order 5-15% below.
6-Use stocks/ETFs/sectors you're willing to invest in. I pick sectors I like (REITs, metals, energy, etc...) then pick stocks in those sectors without getting too picky about each company.

***Outperformed the market in a down year but feel it may underperform in an up year.
***Would NOT average down for day-trading. Cut the losers, trail the winners.

Conclusion: Averaging down can work if done with a plan IMO. Is it better than cutting the losers? Probably not. My experiment is far too short to know. Remind me to update in Dec/Jan.

Appreciate your observations but IMO trading as a business is about developing good habits, repeatability, and consistency. Averaging down has the potential to destroy one's account, at least undo all the good work behind tens or even hundreds of profitable trades. And I don't need to overemphasize how important maintaining sanity is in trading - the huge drawdown and hence extreme stress averaging down can potentially cause is totally avoidable! I have suffered countless times on this front to reach a conclusion that a trader relies on averaging down when they fail to understand the market. Period. There are many ways to make money in trading while maintaining good mental health and averaging down is surely not one of them.

 

[newwurldmn]

Actually there was lots of warning to get out early for a momo trader.

but the dumbo averaging down trader keeps buying like a robot.

 

[VicBee]

Yup of course especially TSLA lol. To the moon and then almost 3/4rds of the way back down.

If that doesn't scream to a momo trader, at some point after the top, to get out ... nothing will.

Love the post game expert. Did you load up at 101 or did you expect a drop to 5 like others?

 

[VicBee]

I have a probably unfounded reason to refrain from creating stop losses when I'm trading, which is, it advertises my position on the board for anyone and any system to act upon. I've seen enough times my stop loss getting triggered before reversing and going long. Instead, I'd rather stare at my screen and place a sell order at a pre decided price.

The same goes for placing orders in pre market (because everything is much slower). If the price is at 220, I send a buy order at 200 and set up (but don't send) another buy order at 180. If I see the price drop to grab my initial order, I cancel it right before the trigger and immediately place the new buy at 180. Often enough to believe it's not random, the price will revert back up a bit before attempting to grab my 180 order. I've led a price to drop by 70 before triggering my low order and then watch the price return to its initial level.

The argument I hear is, lol you think your orders move markets? I agree, it seems farfetched and I'm probably just trying to create logic from randomness. Yet, relying on my experience, advertising your orders to the board invites actions that often don't feel right to me.

 

[TheDawn]

I have a probably unfounded reason to refrain from creating stop losses when I'm trading, which is, it advertises my position on the board for anyone and any system to act upon. I've seen enough times my stop loss getting triggered before reversing and going long. Instead, I'd rather stare at my screen and place a sell order at a pre decided price.

The same goes for placing orders in pre market (because everything is much slower). If the price is at 220, I send a buy order at 200 and set up (but don't send) another buy order at 180. If I see the price drop to grab my initial order, I cancel it right before the trigger and immediately place the new buy at 180. Often enough to believe it's not random, the price will revert back up a bit before attempting to grab my 180 order. I've led a price to drop by 70 before triggering my low order and then watch the price return to its initial level.

The argument I hear is, lol you think your orders move markets? I agree, it seems farfetched and I'm probably just trying to create logic from randomness. Yet, relying on my experience, advertising your orders to the board invites actions that often don't feel right to me.

I am curious are stop-loss orders marked actually as "stop-loss orders" on the exchanges or ECN's for all market participants to see that they are stop-loss orders? Your broker might know them as stop-loss orders when they are registered so on their platforms but the exchanges? I am not sure. To the exchanges and all the market participants, stop-loss orders are just market orders for them to be executed immediately. For retail Forex it might be different because everything is traded OTC and your broker who sees your orders are also the ones who execute them. But then again with the Payment For Orderflow, the MM's that pay for the orders really do take the opposite side of your orders, do they really see your orders as stop-loss orders? Perhaps some former MM's here can comment.

If you are really concerned about the privacy of stop-loss orders, what you can do is put them in as hidden orders or MIT (Market-If-Touched) or LIT (Limit-If-Touched) orders. These orders are supposed to be sitting on your broker's platform and only sent to the exchanges when the price specified in the order has been reached.

 

[BKR88]

Appreciate your observations but IMO trading as a business is about developing good habits, repeatability, and consistency. Averaging down has the potential to destroy one's account, at least undo all the good work behind tens or even hundreds of profitable trades. And I don't need to overemphasize how important maintaining sanity is in trading - the huge drawdown and hence extreme stress averaging down can potentially cause is totally avoidable! I have suffered countless times on this front to reach a conclusion that a trader relies on averaging down when they fail to understand the market. Period. There are many ways to make money in trading while maintaining good mental health and averaging down is surely not one of them.

The purpose of having MANY (>100) is to avoid "destroying one's account".
If each position is <2% of the account, even if a couple positions go to zero it's still a small % of the account.
I also mentioned you HALT entries after ___ entries. This prevents 1 position from becoming too large a % of the overall account.
This experiment is UNTESTED long-term so I'll continue & report in another year. I opened another account mid Jan. that will be 100% this method so I have a clean record.

 

[SunTrader]

Love the post game expert. Did you load up at 101 or did you expect a drop to 5 like others?

Paranoia lack of stop loss-a will destroy ya lol

Who are those others, again besides the OP, on other topic who said $5????

 

[VicBee]

Paranoia lack of stop loss-a will destroy ya lol

Who are those others, again besides the OP, on other topic who said $5????

I see you're deflecting my question. Perhaps you expected TSLA to drop some more and froze watching it gain 100% in 30 days. That's just too bad but don't worry, there's still time to get in and catch the next 100%. Might take a bit longer this time around though.
I imagine the group of Tesla haters in here are all short sellers who had their time in 2022, but their expectation of a continuous drop in 2023 will have them give back their gains. You can find who they are in the various Tesla threads of the last month or so.

 

[rparmar70]

The purpose of having MANY (>100) is to avoid "destroying one's account".
If each position is <2% of the account, even if a couple positions go to zero it's still a small % of the account.
I also mentioned you HALT entries after ___ entries. This prevents 1 position from becoming too large a % of the overall account.
This experiment is UNTESTED long-term so I'll continue & report in another year. I opened another account mid Jan. that will be 100% this method so I have a clean record.

OK. For long stock/ETF positions this may make sense. I trade only futures (ES/NQ) where the downside is also limitless.

Given stocks have been so positively correlated lately (and hence I hear that stock picking business is dead), how do you diversify?

 

[rb7]

I am curious are stop-loss orders marked actually as "stop-loss orders" on the exchanges or ECN's for all market participants to see that they are stop-loss orders? Your broker might know them as stop-loss orders when they are registered so on their platforms but the exchanges? I am not sure. To the exchanges and all the market participants, stop-loss orders are just market orders for them to be executed immediately. For retail Forex it might be different because everything is traded OTC and your broker who sees your orders are also the ones who execute them. But then again with the Payment For Orderflow, the MM's that pay for the orders really do take the opposite side of your orders, do they really see your orders as stop-loss orders? Perhaps some former MM's here can comment.

If you are really concerned about the privacy of stop-loss orders, what you can do is put them in as hidden orders or MIT (Market-If-Touched) or LIT (Limit-If-Touched) orders. These orders are supposed to be sitting on your broker's platform and only sent to the exchanges when the price specified in the order has been reached.

For exchanges supporting stop-order, "Stop loss order" are identified as "stop-order".
For exchanges not supporting stop-order, they are held and processed internally by the broker.

Not sure what you meant by "...are just market orders for them to be executed immediately", cause stop-orders have nothing to do with being immediately executed. It's totally the reverse.