Why you should average up, NEVER down

[HATEtheRisk]

The only thing what makes sense, is to average down, when you are in profits and odds change !!!

Never let the trade become a open loss, close it all and take the loss, if it goes below your entry price !!!

Never add to a position !!!

Simple rules, guarantee safe trade / risk managment !!!

 

[Lucias]

Averaging either up or down if leveraged can result in a worse condition. At any rate, averaging up or down increases net risk. Averaging down increases net risk but improves entry price while averaging up increases net risk and hurts average price but benefits from accumulated profits.

Instead of averaging up, it may be more effective to buy an OTM call option because you have limited risk.

I'm not a fan of either averaging up/down. I sometimes add more size as I become more confident in a trade.

I've toyed with an idea of averaging down within limits. For example, let's say I think the market will go down or up. I can buy at market or wait to try to get a better limit fill. If I wait for the limit fill then I often miss the best trades but if I go at market then my entry is poor. So sometimes I'll do both. I'll go to market and then add a few on the limit too. This ensures I get filled while giving me a better price if my entry is poor. The downside is that my max loss is increased. Typically I don't average though, either way.

If I weren't trading with much leverage then I'd probably favor to average down (within limits and only long) and buy OTM call options if I wanted to average up.

 

[FreakofNature]

Quote from mindtrade:

My dream trade is catching a 1000pip move in forex and averaging up every 100pips or so!

My dream trade is catching up a 1000pip move on the total of your final size and take no heat

FoN

 

[ElectricSavant]

This seems reasonable to me. Just another way to set stops with a confirmation of price...thats all this is...

heHe..do it on the long and the short side at the same time and find your way...

eS

 

[HATEtheRisk]

Quote from HATEtheRisk:

The only thing what makes sense, is to average down, when you are in profits and odds change !!!

Never let the trade become a open loss, close it all and take the loss, if it goes below your entry price !!!

Never add to a position !!!

Simple rules, guarantee safe trade / risk managment !!!

Sorry, i think i have misunderstood the word average, it means here to add to a position, right ?

Then, i say: You may never average up or down, in other words, never add to a position, once you entered all what you want to risk.

The only thing you can do is, close your position partly, if the odds change, or targets got hit.

everything else is stupid for an market timer.

But Warren Buffett, might have a different approach here.

Its dependent on the trading / investment style !!!

cheers

 

[deadbroke]

Quote from garfangle:

A reason why traders blow up is because they average down their trades, when they should instead average up.

It is tempting to accumulate more stock when the price falls, but this strategy is wrong because human psychology cannot handle the pain of severe drawdowns. Also, you cannot implement a stop loss order to protect your account if you average down because the stock can always get cheaper and then you are stuck once you have no funds left to average down with.

The alternative is to average up and accumulate stock as it rises. Even though your cost basis rises, you can implement a stop loss order strategy if the trade goes against you. Therefore, you rarely suffer punishing drawdowns that cause you to cry uncle and wipe out your account.

The danger of an average down strategy is you have no point of reference when you should acknowledge you are wrong which allows you to cut your losses before they snowball.

Assume:

-initial $100 stock
-100 share order
-(pain threshold at $50)

price falls to $90, do you accumulate more or sell?
price falls to $80, do you accumulate more or sell?
price falls to $70, do you accumulate more or sell?
price falls to $60, do you accumulate more or sell?

Even though your cost basis falls, you are accumulating ever greater losses and have no reference point when to stop. Moreover, you cannot assume the the stock will recover enough to get you back to break even.

The advantage of an average up strategy is there is a point of reference when you know you are wrong and the price at which to sell.

Assume:

-initial $100 stock
-100 share order
-stop loss $90

price rises to $110, do you accumulate more or sell?
-you accumulate more and set a stop loss at either $100 or $105 (break even)
price rises to $120, do you accumulate more or sell?
-you accumulate more and set a stop loss at $110
price rises to $130, do you accumulate more or sell?
-you accumulate more and set a stop loss at $115
price rises to $140, do you accumulate more or sell?
-you accumulate more and set a stop loss at $120

Even though your cost basis rises, you know where your break even price is at and can adjust your stop loss accordingly.

R E T A R D asks and 100s of retards answer


and not one mentions anything about the extant TREND

 

[atlTrader666]

Average up for products that trend...

Average down for volatile products that tend to go sideways...

 

[Trader666]

Either one can be highly profitable or cause you to blow up. Both are methods; nothing more, nothing less. The key is in knowing how to use each and when.

Quote from garfangle:

A reason why traders blow up is because they average down their trades, when they should instead average up.

 

[usrx201]

The main problem with averaging down is not psychologically able to handle a stop loss. One may have been able to get out on a non-averaged positioned. But what about after having scaled in multiple times? Before you know it, facing a stop loss 4 to 10x more than what one is used to is daunting and then the mistake of hoping the whole market will just turn around, hoping and waiting.

 

[trade2live]

B.S. Averaging up is most of the time not a good idea, except if you trade stocks where moves can be very large over the medium term. For short term trading in some markets , averaging down is a good strategy if and only if it's part of the initial plan. You can average down even when that was not part of the plan but you risk taking a big hit and yes blow up your account if you are stupid. Done cautiously and intelligently though it can sometimes be considered, however NOT worth the risk most of the time.