Averaging down..................

[tommog]

good thread here.

I have worked in several large trading offices and i have seen some incredibly well known "names" in the city, which are known for being very successful traders loading up the order book averaging.

However as a few people have pointed out it has to be part of an overall strategy and risk management plan.

 

[alan5616]

The only people that think it's a bad thing to do are ignorant of proper risk management.

Nick Leeson was great at building a position along with several other traders who've done serious damage to the bottom line of their employer's P & L a/cs.

It's a very dangerous strategy. Ask those shareholders of Marconi who bought at 800p and "built their positions", as the price declined over several months. It ended up at 10p.

 

[robster970]

Thankfully, the only person likely to get damaged out of this is me. I'm trying to understand whether it can be part of a valid strategy providing I manage it correctly. Just because it does not work for some people, it does not mean it could not work for me, after all my risk appetite, extent of capitalisation and trading strategies are specific to me.

I don't buy the one cap fits all even if the general principle is sound for unsophisticated trading strategies and risk mgmt.

It's like saying all poison is bad. Therefore we shouldn't have chemothreapy.

 

[virtuos0]

Nick Leeson was great at building a position along with several other traders who've done serious damage to the bottom line of their employer's P & L a/cs.

It's a very dangerous strategy. Ask those shareholders of Marconi who bought at 800p and "built their positions", as the price declined over several months. It ended up at 10p.

Your point boils down to "crap traders lose money".

Leeson lost money because Barings trusted him to not need any risk management, so he went and acted like a kid locked in a sweet shop. He was a poor trader who rose to a position way above his competence level.

As far as people buying a dying company down to zero, well again their demise isn't caused by the method, it's caused by their incompetence.

A strategy is only as good as the trader using it.

 

[virtuos0]

Thankfully, the only person likely to get damaged out of this is me. I'm trying to understand whether it can be part of a valid strategy providing I manage it correctly. Just because it does not work for some people, it does not mean it could not work for me, after all my risk appetite, extent of capitalisation and trading strategies are specific to me.

I don't buy the one cap fits all even if the general principle is sound for unsophisticated trading strategies and risk mgmt.

It's like saying all poison is bad. Therefore we shouldn't have chemothreapy.

Looks like we were writing essentially the same thing at the same time.

 

[alan5616]

Your point boils down to "crap traders lose money".

Leeson lost money because Barings trusted him to not need any risk management, so he went and acted like a kid locked in a sweet shop. He was a poor trader who rose to a position way above his competence level.

As far as people buying a dying company down to zero, well again their demise isn't caused by the method, it's caused by their incompetence.

A strategy is only as good as the trader using it.

Virtuoso,

Marconi was a dying company, in hindsight, but, many reputable analysts were predicting the price to go above 1,000p. These people were not forum whisperers; they were working for the major stockbroking firms. Let's leave that aside, as it's now history.

I have no quarrel with scaling in being used as a proper strategy. Unfortunately, it is, potentially, financially damaging if utilised by the inexperienced. Nowhere is this more apparent than in the forex market. I was trading £/Yen, in July 08 @ around the 210 level. By Jan 09, it had dropped to 119. Scaling in would have been disastrous, without strict risk management

There have been some generalisations put forward but, nobody seems to have, specifically, given clear guidelines on how to use scaling in to it's best effect. I'll do my best to set it out, as there are inexperienced traders that may benefit. I'm a Spread Bettor so, I'll use that terminology rather than x lots to illustrate how scaling in works.

If my normal bet is £10 per pt., and I feel that GBP/USD is going to 1.70+. I'm convinced that this current move back to the 1.66 level is a pull back. I have two immediate options (I'm disregarding Stop and Limit orders for this example). Firstly, I can make a bet at market for the full £10 and look forward to it reaching that level or, if the market has been quite choppy, I can scale in. I break my £10 stake into five tranches of £2 each. I place my first trade @ market (say 1.6650) for £2. If the price drops to 1.6625, I can place the next £2 and so on, until the 5 tranches have been exhausted. I pre-determine where my final SL is going to be and once hit- no more scaling in.

The benefits of the above strategy are that I will benefit from price moves above my entries and my risk is reduced because I am not betting the whole £10 per point in one go.

If I appear to be arguing against myself, that's not the case. I feel that most people do not know the difference between scaling in and adding to losses hence the above explanation.

 

[virtuos0]

There have been some generalisations put forward but, nobody seems to have, specifically, given clear guidelines on how to use scaling in to it's best effect. I'll do my best to set it out, as there are inexperienced traders that may benefit. I'm a Spread Bettor so, I'll use that terminology rather than x lots to illustrate how scaling in works.

I don't believe it's possible to give clear guidelines on this issue, because it depends on the interaction of so many different factors. To name but a few:

- risk tolerance
- transaction costs
- Your position size
- The liquidity of the market
- Your knowledge of the market
- Volatility

How you make a distinction between scaling in and adding to a loser depends mainly on the first factor I suppose, risk tolerance.

 

[episteme]

Unless you never have a trade go against you for any length of time EVER. Averaging down /Scaling in / whatever - is a perfectly good and valid way to enter a trade. Extending your exposure above your tolerance just because the price is better than it was however is just stupid.

 

[alan5616]

I don't believe it's possible to give clear guidelines on this issue, because it depends on the interaction of so many different factors. To name but a few:

- risk tolerance
- transaction costs
- Your position size
- The liquidity of the market
- Your knowledge of the market
- Volatility

How you make a distinction between scaling in and adding to a loser depends mainly on the first factor I suppose, risk tolerance.

It may not be possible to give clear 100% foolproof guidelines for scaling in strategies. What I tried to illustrate was a logical method of approaching it, taking all the points that you mention into consideration.

I'm sure that most of us are trading liquid markets (in my case major forex pairs). I believe Robster mentioned the S&P in his original post. I wouldn't want to be scaling in to Joe Bozo's Pneumatic Washer Co., as it's taking a dive on the OTC market, any more than I'd be taking a view for parity beween the Zimbabwean$ and the Euro.

Trading decisions should be made logically, not impulsively. Here endeth the lesson

 

[Emini-mouse]

before you average down perhaps if you ask yourself the question - would i enter this trade if my original trade wasnt running?

 

[robster970]

What about a different question.

Did I enter the trade at a less than optimal level and can I improve the reward for this trade whilst staying within acceptable risk limits?

For me, this was about accepting that the entry was not as efficient as I would have liked it and taking advantage of more solid confirmation of where support really was and taking advantage of that.

The answer to your question BTW was yes. I wouldn't do anything else. I can justify almost all of my trades from an execution POV. I do make mistakes though. I'm still learning and will never be perfect.

 

[Emini-mouse]

ive had up to 30 winning trades in a row trading YM and averaging down . it does wonders for your win/lose ratio. but its when things go to extreams --- sooner or later you have to accept the big loss

 

[robster970]

ive had up to 30 winning trades in a row trading YM and averaging down . it does wonders for your win/lose ratio. but its when things go to extreams --- sooner or later you have to accept the big loss

Do you condone it's use then or have the the odd big loss you've sustained been so overwhelmiong that it's made you think twice?

 

[GladiatorX]

Something Weighbridgegay taught me recently is that all such strategies are just a re-formation of a standard trade and in themeselves don't offer an edge; In the end, you still need 2 be able to trade and have good entries and be good at trade management - Most people who feel the need to average down, do so because they AREN'T very good; However it can offer a good style of management for those that are actually good at trading.

Doing it instead of good trading simply won't work.

 

[counter_violent]

From a practical point of view lets say for arguments sake there are 2 types of trade.

1) TOP / BOTTOM / CONTRARIAN

Averaging /scaling in, might be the option for peppering a top/ bottom zone with split stake/ building a position where it is not certain where this top/ bottom reversal will form.


2) BREAKOUT / CONTINUATION /TREND

Normal stake could be used on the second type of trade, where the parameters are known in advance. Either the trade works or it fails. Repetitions.


---------------------------------------------------
Post No 4 for reference.

The most important point would be to reduce stakes.
Take your normal size stake and split it down.
Any additional stake entries NEED to work in favour of the initial stake...if they do not...then bin them off...as there will always be more opportunities that come along later.

 

[robster970]

Doing it instead of good trading simply won't work.

I started the thread off to discuss it's viability in an already profitable strategy. I'm already profitable trading breakouts and reversals when rangebound so the popular view of 'losers average losers' is not really pertinent. LIke you've highlighted and from what people have said, it can be useful if used correctly and you can already trade so to speak.

Nice summary too CV.

Thanks for the feedback guys and girls. Always a pleasure, never a chore.

 

[Emini-mouse]

Do you condone it's use then or have the the odd big loss you've sustained been so overwhelmiong that it's made you think twice?

yes i average down once on short tfs but only if i think its a rangeing day

 

[SimpleTrader09]

When I first read averaging down, I didn't realise you meant scaling in. To me they are two different things. You can scale in as price is moving in your favour or as price is moving against you or even at the same price, but when you average down, I assume you're adding money to a position that is losing.

When you developed your system, you probably researched it and decided on how much to risk 2%. But if at any point in the research of your system you didn't decide to risk 6% on particular trades, then you're not going with your system. Seems very strange to risk more on trades that are going against you. I'd rather be adding to the good ones. From your posts, I gather that you got stopped out today soon after open. You lost almost 3 times the amount you were supposed to lose. It potentially worked, because you could have taken a good profit. But 6% is a lot to lose on one idea that you had already been informed by the market wasn't the best entry. At the end of the day it cost you a lot by doing it. Do you still think it is a good thing?

About exiting and re-entering. Suppose you had 2 lots. Price moved against you. You could exit half. Wait for it to go down to a better entry price, and re-enter. You have then brought your average price down without increasing your risk. Good thread though. Nice to see some different ideas.

 

[robster970]

You're right - I did take a hit at 6% especially as I could have taken a 9.75% profit last night before the Nikkei opened.

Do I think it's a good idea? I think there is something there but it needs further refinement. I've also learnt a lot and put this down to the cost of my education. That cost is about 2-3weeks profits which isn't great but isn't catastrophic either.

My big mistake was getting wedded to the trade and not taking the exit last night after the 1d showed that it was likely to reverse after trying twice to reach the high, failing twice and only getting to 1111 and 1110.

Next week's thread: Trading without stops - suicide or genius?

 

[tommason]

I break that rules and I make lots of money. you know as long as u know when to bend and when not to at the right time and see how many time left.
I post my real broker statement in my post u can check it out. I do not even put any stop and I do avg down.

Averaging down is a bad habit , and bad habits don't go away easily.Averaging down is buying against the odds or buying against a potential trend reversal.

The habitual averaging leads to increasing exposure on losing trades,and if used simultaneously on multiple instruments , can lead to disastrous consequences. .NEVER ADD TO A LOSING TRADE is a golden rule .Never break this rule!

o d t