Tired of people downplaying averaging down
- Thread starter No.Heat
- Start date
This is a rtm strategy, right? You're betting the "trend" won't continue, right? That's the whole basis of the strategy, not a tangent.
As others have stated, trade mgmt is so key to successful averaging. I know this is a vague statement, but those who employ these strats successfully understand how important proper trade mgmt really is.
If you lose your cool in a avging situation it's very easy to lose your bankroll so stay disciplined!
If you lose your cool in a avging situation it's very easy to lose your bankroll so stay disciplined!
When i think of average down traders, I think of those that try to catch a falling knife then get pissed when they get burned.
Right. Trend trading is trading the trend. What you're describing is martingale countertrend trading. You can blow smoke about trading the fractal blah blah blah, but you've got a martingale rtm strategy that's basically "this is to high it's going back down and if I'm wrong I'll double down to get back to even because I can't believe the idiots have driven this thing up so high" strategy.
A traders account balance and statements are comprised of a plethora of averaged up/down transactions.
Averaging up and down inside a protected range is a fairly strong strategy. ie. wrap a 50 point range for ES with a pair of puts and calls 10 strikes out and scalp the oscillations. The temptation is always to accelerate the exits and profits by scaling size. This is typically the cause of most blow-ups.
If you scale size linearly.. ie.. add 1 contract every 10 points up to 5 contracts even if the market drops 50 points without a 50% retracement for an exit your max draw down is only 150 points.
Your options hedge absorbs about 1/3 of the hit when your on the wrong side of a deep move and make an extra 1/3 when your able to exit the underlying and slide with the market.
The purpose of this hedge is to mitigate a portion of the big hit that happens occasionally in an always in strategy. using covered strategies the overall options play nets a small profit and covers these blow-ups. The meat of your profits come from scalping oscillations averaging up and down the underlying.
These strategies are fairly conservative and relatively easy to automate and back test. They work particularly well when you trade both sides of the market in sub accounts and correlate the two positions.
Averaging up and down inside a protected range is a fairly strong strategy. ie. wrap a 50 point range for ES with a pair of puts and calls 10 strikes out and scalp the oscillations. The temptation is always to accelerate the exits and profits by scaling size. This is typically the cause of most blow-ups.
If you scale size linearly.. ie.. add 1 contract every 10 points up to 5 contracts even if the market drops 50 points without a 50% retracement for an exit your max draw down is only 150 points.
Your options hedge absorbs about 1/3 of the hit when your on the wrong side of a deep move and make an extra 1/3 when your able to exit the underlying and slide with the market.
The purpose of this hedge is to mitigate a portion of the big hit that happens occasionally in an always in strategy. using covered strategies the overall options play nets a small profit and covers these blow-ups. The meat of your profits come from scalping oscillations averaging up and down the underlying.
These strategies are fairly conservative and relatively easy to automate and back test. They work particularly well when you trade both sides of the market in sub accounts and correlate the two positions.
"A traders account balance and statements are comprised of a plethora of averaged up/down transactions."
Let's ignore the average up trades for a moment . . . It doesn't matter whether a trade is an average down or not. Each trade is independent . . . just like every coin flip. So it doesn't matter whether 1/3 of the trades are average downs, each trade has it's own expectancy independent of whether it's an averaging or not. Scaling in is just a way of maximizing win rate, it's not "trade management" or "money management."
Nobody believes me when I say this. Think about it this way. Let's say that your portfolio is 50% market risk and 50% idiosyncratic risk. Every new buy either adds to one or both. By scaling in to a certain position, you're adding to market or idiosyncratic risk FOR THE ENTIRE PORTFOLIO. It doesn't matter whether that particular position is a winner or loser, but how the whole portfolio performs.
Let's ignore the average up trades for a moment . . . It doesn't matter whether a trade is an average down or not. Each trade is independent . . . just like every coin flip. So it doesn't matter whether 1/3 of the trades are average downs, each trade has it's own expectancy independent of whether it's an averaging or not. Scaling in is just a way of maximizing win rate, it's not "trade management" or "money management."
Nobody believes me when I say this. Think about it this way. Let's say that your portfolio is 50% market risk and 50% idiosyncratic risk. Every new buy either adds to one or both. By scaling in to a certain position, you're adding to market or idiosyncratic risk FOR THE ENTIRE PORTFOLIO. It doesn't matter whether that particular position is a winner or loser, but how the whole portfolio performs.