Average down - small wins, big losses?

This is a discussion on Average down - small wins, big losses? within the Psychology, Risk & Money Management forums, part of the Methods category; When one averages down on a position, it entails taking only small winners when the price moves in the direction ...

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Old Oct 8, 2017, 9:25am   #1
 
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Average down - small wins, big losses?

When one averages down on a position, it entails taking only small winners when the price moves in the direction of your position instantly and does not allow for more entries at a better price. On the other hand, your losses are made with your biggest position size. So, you have small wins and large losses. How can that be a profitable strategy?
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Old Oct 8, 2017, 9:48am   #2
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Originally Posted by pebesiak View Post
When one averages down on a position, it entails taking only small winners when the price moves in the direction of your position instantly and does not allow for more entries at a better price. On the other hand, your losses are made with your biggest position size. So, you have small wins and large losses. How can that be a profitable strategy?
There are possibly two trading concepts that may be in play and may look similar descriptively but substantively is very different depending on the risk management approach, position sizing and trade strategy. Averaging down and scaling in is like comparing apples and oranges.

If by your definition, averaging down as having small winners and large losses, then there is really no discussion needed as it is a simple mathematical expression of your win rate and RR.
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Old Oct 8, 2017, 9:53am   #3
 
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pebesiak started this thread Please provide a practical example. Let's say your first long entry is at 1900. Then the price moves to 1902, so you exit with a small size. On another occasion, you enter long at 1900, the price moves down to 1898, you add more, to 1895, you add more and to 1890 where you exit with a big loss. How is that a viable strategy?
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Old Oct 8, 2017, 9:55am   #4
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Averaging down is a losing strategy. It is only recognised because many new traders will try it without understanding the implications. They don't find its sustainable and they disappear from the game before long.

On the other hand, what successful strategy / strategies) are you planning?
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Old Oct 8, 2017, 9:58am   #5
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The only determining factor is whether you know which direction the market is going. Averaging down is not part of the picture. If you don't know which way it goes, the small losses will wipe you out just as big losses.
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Old Oct 8, 2017, 10:01am   #6
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tomorton is a good source of shop material. If you want to know what shops don't like, you can go by what he says.
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Old Oct 8, 2017, 10:35am   #7
 
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Originally Posted by pebesiak View Post
Please provide a practical example. Let's say your first long entry is at 1900. Then the price moves to 1902, so you exit with a small size. On another occasion, you enter long at 1900, the price moves down to 1898, you add more, to 1895, you add more and to 1890 where you exit with a big loss. How is that a viable strategy?
Whats your objective? Whats your desired size? Why would you be getting out at 1890?

Averaging down and scaling size are different things.
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Old Oct 8, 2017, 10:57am   #8
 
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pebesiak started this thread You will be getting out at 1890 because you have reached your max position limit at 1895. Is averaging up not better? You lose small and win big
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