Why does nobody average down?

Splitlink said:
I think that they probably do. If anyone wants to add to a loss, in the belief that the price will reverse, they must have a good reason for doing so. That means researching outside of what the chart says. What I fail to understand is not that they may be right, but why take the risk? Why not close the loss and enter later?

Anyway, everyone to his own point of view!
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You're right Split. The only reason would be in intraday trading where noise is much more a factor. Many people try to "stick" an entry day trading, but a modest scale in strategy with the right risk parameters can help get the best position.

Swing or longer term don't have to be as exact. I would feel much better about taking the loss trading in the longer time frame than try to nurse a loser along by averaging down.
 
A few weeks is meaningless. Averaging has a negative expectancy, you can get away with it maybe even for years but when it doesn't work it'll blow your head off. Just ask a carry trader olol

edit your journal shows you pyramiding not averaging down.
 
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Scaling in is definately an acceptable forex trading strategy as long as your risk paramaters are never compromised with the combined position.

for example if you have a $10k account and are willing to risk 2% on a trade (that's $200). then if you have 1 standard lot open and your down -10 pips ($100), you can easily add another lot and carry a 15 pip stop on the entire position.. (1 lot -15, and 1 lot -5 = $200). This allows you to hold 2 lots in the position. If you opened with the 2 lots from the start, you could only carry a 10 pip stop. (this could be scaled to 2 minis with 150 and 50 pip stops for longer term traders using minis.) This strategy also increases your risk reward ratio.

However, If you are down -25 ($250) and instead of stopping out, you add 3 lots thinking "If it just comes back up a few pips, I'll be at breakeven then I'll get out..", then you are averaging down for the sole purpose of throwing a hail mary to rescue a losing position, ...you are dead in the water... maybe not this time, or the next, but if you make it a habit, it's just a matter of time before you margin call.

...good trades,
Sam
 
rawrschach said:
A few weeks is meaningless. Averaging has a negative expectancy, you can get away with it maybe even for years but when it doesn't work it'll blow your head off. Just ask a carry trader olol
Click to expand...

I agree that done improperly and without the proper discipline, it is a recipe for annihilation.

Anyway, I will post it if or when it ever happens - and I am pretty sure there are plenty just waiting to go for my juggler lol

Just go back and read what I wrote on how to do it properly - and best of luck to all ha ha!
 
shakespeare515 said:
Scaling in is definately an acceptable forex trading strategy as long as your risk paramaters are never compromised with the combined position.

for example if you have a $10k account and are willing to risk 2% on a trade (that's $200). then if you have 1 standard lot open and your down -10 pips ($100), you can easily add another lot and carry a 15 pip stop on the entire position.. (1 lot -15, and 1 lot -5 = $200). This allows you to hold 2 lots in the position. If you opened with the 2 lots from the start, you could only carry a 10 pip stop. (this could be scaled to 2 minis with 150 and 50 pip stops for longer term traders using minis.) This strategy also increases your risk reward ratio.

However, If you are down -25 ($250) and instead of stopping out, you add 3 lots thinking "If it just comes back up a few pips, I'll be at breakeven then I'll get out..", then you are averaging down for the sole purpose of throwing a hail mary to rescue a losing position, ...you are dead in the water... maybe not this time, or the next, but if you make it a habit, it's just a matter of time before you margin call.

...good trades,
Sam
Click to expand...

Great post!

Personally, I think each trader must learn the hard way - then survive to trade again.

Regardless, there is a right and wrong way to "average" - I prefer to call it "Scale into / out of" a trade. Also called "managing the trade". I scale into, out of and pyramid regularly - as I am showing in my journal........but always WITH THE TREND and ONLY for a TRADE.

I go for consistent singles - and will take the home run when I can get one - not the other way around.
 
RockyRacoon said:
Great post!

Personally, I think each trader must learn the hard way - then survive to trade again.
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It would seem that you are right and that there will always be those who swim against the current.

There is no reason why that should be so, though, and I hope that new traders will think it through and understand why it is so dangerous.

The market does not care, one way or another, whether the trader wins or loses. It has infinitely more money and can always absorb any winning trades that he may have. The trader, however, has finite resources.
 
yes it works actually u just have to know how to do it. but you need continous internet connection . few days ago my internet was down while I was averaging down and it scewed up my account :(.
I am talking about day trading not position trading
 
averaging down works well for daytrading too. Take cable, big pullback to its trendline off dailies, so as a swing trade i average into a short position, but intraday off hourlies i buy the dips in this trend, averaging down into them if needed. And if hourlies form a range, then there's not really much point in averaging down so in a range i only pyramid, if i think a bounce will happen at support i put 10%, add as it goes along my way, but ALWAYS using a stop that rarely gets hit, and 1% risk.

so ive found out that it's difficult to average and pyramid in the same trade so imo it's easier to:
only average down in pullbacks in trends
only pyramid in a range situation.
 
Since I am an Investor, the method of Averaging down does in fact work, providing you have strong reasons and conviction as to why you invested in a company in the first place.
Take a very simplified theoretical example, a company trading at 16p per share, it has been calculated using the most conservative of calculations, as well as a solid understanding into the companies future prospects as 30p per share. If the share drops to 13p per share (ceterus paribus)--- would it make sense assuming conviction was stronger not to buy more.... (Only if you can't afford to potentially loose more money).
 
GLOBAL MACRO said:
Since I am an Investor, the method of Averaging down does in fact work, providing you have strong reasons and conviction as to why you invested in a company in the first place.
Take a very simplified theoretical example, a company trading at 16p per share, it has been calculated using the most conservative of calculations, as well as a solid understanding into the companies future prospects as 30p per share. If the share drops to 13p per share (ceterus paribus)--- would it make sense assuming conviction was stronger not to buy more.... (Only if you can't afford to potentially loose more money).
Click to expand...

It will work, provided the share price goes up. :)

Your example is based on FA and I suggest that those picking up at those prices are investors more than speculators.

I bought Next PLC shares very cheap but I hesitated to buy them when they were penny shares and waited until they rose to over 2 pounds before buying them. They were a give away but buy them on the down trend? I did not have the nerve. I sold those for over 14 pounds, in the end.

My advice for the ordinary trader is not to speculate on falling shares but, even if the prospects are good, wait for the trend to turn. Averaging down is not to be done lightly.
 
RockyRacoon said:
Great post!

Personally, I think each trader must learn the hard way - then survive to trade again.

Regardless, there is a right and wrong way to "average" - I prefer to call it "Scale into / out of" a trade. Also called "managing the trade". I scale into, out of and pyramid regularly - as I am showing in my journal........but always WITH THE TREND and ONLY for a TRADE.

I go for consistent singles - and will take the home run when I can get one - not the other way around.
Click to expand...


Yea, scaling in and out is a trade management strategy that will work for those who utilize it properly. The difference between "scaling in" and "adding to a losing position," is simple ....planning.

If you 'plan' on scaling in, then you will not load up on your first entry. You will enter light, so if the price pulls against you, you can fill out your position at a better price. If you load up on your first entry, then add more later, you could eventually find your self putting much more of your capital at risk. All it takes is one or two losses and you could have 50% drawdown or more.

It is important to always abide by your money management principals. dont ever put more at risk on one trade than your plan allows. This is the number one cause of failure for new traders..

...good trades
 
yes...it has to be planned really, i wait for a good entry, if im right i pyramid , if im wrong ill average and take pips elswhere
 
I'm experimenting at the moment with pyramiding, but only if the previous trade is in profit and I think it is safe to move the stop to BE, so the pyramided trade is not adding to the overall risk.

I used to argue against moving stops to BE, and it can often be problematic, but at least you can experiment with it over and over again and not risk too much. I'm hoping that with lots of experience, I'll get good at judging when it is really the right time to move it and when not.

Well, I'll see how it goes; it's early days in this experiment.
 
the way i 'pyramid' is to use the same stop loss but use multiple targets for each division, say on the 10% ill aim for the whole shabang....with the 30 less...etc
 
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