Why you should average up, NEVER down

One of the many problems with newcomers and losing traders is that they do not think outside the box.

Trading is not a one size fits all journey.

You need constant adaptation.

When you are experiencing a market constantly reverting to it's mean averaging up will kill you, slowly but surely. In this kind of environment averaging down is much more safe, provided you can recognize when conditions have changed, and using proper risk management.

However, on the opposite side of the spectrum a combination of both will make you rich in a trending environment, again, provided you are trading with the strong winds and assuming you can recognize the storm you are trading in.

Trading is an art, don't approach it any other way or you will fail.

Crazy A
 
Quote from crazyAtrader:

One of the many problems with newcomers and losing traders is that they do not think outside the box.

Trading is not a one size fits all journey.

You need constant adaptation.

When you are experiencing a market constantly reverting to it's mean averaging up will kill you, slowly but surely. In this kind of environment averaging down is much more safe, provided you can recognize when conditions have changed, and using proper risk management.

However, on the opposite side of the spectrum a combination of both will make you rich in a trending environment, again, provided you are trading with the strong winds and assuming you can recognize the storm you are trading in.

Trading is an art, don't approach it any other way or you will fail.

Crazy A
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Yes but identifying is the market is consolidated or trending or if the consolidation is over and about to start trending is pretty much all there is to it to trade profitable.

The rest are just bonuses for calibration no?
 
Quote from 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.
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I ave down on all my ES futures trades, I add on to each level up to 3.00 points, but since I have extensive backtesting of my methods, I know the probabilities of 2 plus losses in a row are remote, so on my existing of all at original entry price for breakeven trade, I clean up. But unless you have done extensive backtesting of your method, ave down can be suicide. And yes, when I have a loss, it is staggering, but very recoverable. Your method has to have a very low losing percentage.
 
Quote from Handle123:

I ave down on all my ES futures trades, I add on to each level up to 3.00 points, but since I have extensive backtesting of my methods, I know the probabilities of 2 plus losses in a row are remote, so on my existing of all at original entry price for breakeven trade, I clean up. But unless you have done extensive backtesting of your method, ave down can be suicide. And yes, when I have a loss, it is staggering, but very recoverable. Your method has to have a very low losing percentage.
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The LARGE majority of traders do NOT have 90%+ win rate so averaging down is a dangerous concept.

You have to think of this like a business. If you sell widgets and cannot keep them on the shelves because everyone wants one....you buy more. Why would you add inventory to a product that is not yet making you money or is losing you money? Get rid of the losers and keep the winners.

Its the same as an employer. Would you keep your poorest performing employees or your strongest? Trading is having your positions work for you.... They are your employees.
 
Quote from Handle123:

I ave down on all my ES futures trades, I add on to each level up to 3.00 points, but since I have extensive backtesting of my methods, I know the probabilities of 2 plus losses in a row are remote, so on my existing of all at original entry price for breakeven trade, I clean up. But unless you have done extensive backtesting of your method, ave down can be suicide. And yes, when I have a loss, it is staggering, but very recoverable. Your method has to have a very low losing percentage.
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problem with this approach is tendency. Occasionally markets throw several winners in a row but then also couple of losers in a row. Traded for long time with accuracy 80% and then 8 losers in a row ! Statistically 0.0003% chance but I still have been served.

My protection is to paper or decrese size after 3 risks below the top.
 
Quote from macroman:

problem with this approach is tendency. Occasionally markets throw several winners in a row but then also couple of losers in a row. Traded for long time with accuracy 80% and then 8 losers in a row ! Statistically 0.0003% chance but I still have been served.

My protection is to paper or decrese size after 3 risks below the top.
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es is a return to the mean index,gold is not
 
Quote from ammo:

es is a return to the mean index,gold is not
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And this is why most trend traders get the $hit chopped out of them chasing because they can't get over the psychological hurdles of fading extremes. One must be the lone wolf and not just another member of the crowd.
 
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.
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I don't like the "averaging up" and i sure as hell don't like the averaging down. Obviously no one should average down, that is insane. But to average up is also not my favorite thing to do. I'll tell you a story of how averaging up just failed me big time in the gold market.

I believe it was 9/13 or 9/14, i shorted 3 YG per account at $1844, added another 3 YG per account a little later in the trading day at $1818 bringing my position to 6 YG per account at around $1831. This is where i should have stopped. Or i should have justed taken a bigger risk initially at shorted 6 YG at $1844 per account. I wanted my position of 9 YG short per account, which is 3 full gold contracts short (zg). So, after it looked like gold broke down, i woke up in the morning a day or two later and saw the price at $1780, and shorted another 3 YG per account. So at this point i was short 9 YG per account, but it had brought my average down to the $1815 level. Well, gold had not truly broken down yet, it quickly turned around and ralled to about $1829 over the next day or two, fell again, and never returned to those levels again. It saw $1550 over the next week. As you can guess, i could not allow it to rise above my average price of $1815 and so i covered in all my accounts i'm trading all those gold shorts.

I missed the biggest trade of the last year because i "averaged up." So it's not a favorite thing for me to do anymore. And in fact, it never was. I like taking a position initially and keeping that position, unless i see another trade setup that i would take even if i hadn't had a position to start with. That's the best policy i believe.
 
if price goes to $110 then I prefer taking profit at $105 than averaging up and ending at BE
it's not about losing a bunch of times and then getting a big trend that will make up all the losses, if you trade that way it's impossible to be consistent, simply because trends are rare, and BIG trends are even rarer.
 
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