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

[robster970]

I can understand why basic principles like "Keep your risk per trade at 1%" , "Don't average down a losing position", "Trade the trend and stay out of sideways markets" are thrown about as the mantra for people starting down the road of learning. Clearly it's sound advice to ensure people can stay long enough in the game to survive.

But surely there comes a point in your development as a trader where you realise that the good that these rules provided when you were completely useless are actually to be questioned in their own right because they might actually be constraining your development as a trader.

Averaging down is one such rule and it's one right now, that under certain circustances and granted, without a huge amount of empirical data (4 times) looks like it could be incorporated into the way that I trade.

Maybe I'll find out that it's a really splendid way of blowing slightly larger lumps of my account but to be frank, I'm probably only going to learn the hard way, like I have with so many other aspects of this lark.

 

[Masquerade]

Newsflash: common trading advice is crap.

 

[oildaytrader]

The Statistical evidence I have suggests common advice works far better than unqualified opinions.

If you have a positive expectancy and stop losses in place ,there is no reason why not to average down.This information on positive expectancy will only be available from backtesting.Write up some code and start backtesting over many instruments over many years, you will truly realise how wrong they were.

 

[robster970]

You know I can code ODT, so you've probably already figured out that I have a background in engineering and natural sciences, both of these being highly mathematical in nature.

I understand the principle of positive expectancy over a significant statistical sample and the value that backtesting provides when the system is static in nature concerning rules, execution, etc. The mantra's are there because of this systemic view of trading which is successful providing you are consistent with rule adherence and execution.

However I also know there is more to trading than just a systemic view of it's execution. Why would prop traders even exist using discretion if all trading could be distilled down to software or a formualaic system? Do you genuinely think financial institutions would employ traders if it could be completely automated?

For me, this lies at the crux of why I am trying to learn to trade rather than leave one of my machines or apps to do it - it is because I know that humans have an edge in terms of flexibility that cannot be replicated by a machine or a systemic view of trading. Growing this skill is what I am trying to do, not be another machine. Then I can have an edge over everybody else that trades in a systemic way.

 

[oildaytrader]

"Don't average down a losing position", "Trade the trend and stay out of sideways markets" are thrown about as the mantra for people starting down the road of learning. Clearly it's sound advice to ensure people can stay long enough in the game to survive.

Averaging down may work for some highly experienced traders, it does not mean it will work for you.If you are new to trading stay away from this type of trading.It is only for people who are highly skilled.

Here is a disaster !

http://www.financevisor.com/default.aspx?g=posts&m=818035

 

[Masquerade]

Averaging can be a profitable trading strategy BUT the problem lies in people start trading with too much leverage. So when they average they use even more leverage halving the amount of breathing space and bringing a potential margin call even closer. WIth low leverage it is a profitable strategy, the real killer is the leverage which people forget.

The motives for averaging are not to be misunderstood. The average trade should not be taken based on the mentality of "i'm X pips in the red, time to average" but instead the average trade should be treated as independent of the original trade and taken because it's an opportunity you perceive as profitable and one you would take regardless of any positions you may have.

If you keep averaging down indiscriminately on trades you will eventually run out of luck and sometimes there is no shame in admitting defeat and taking the loss and moving on. You have to be able to realise whether your logic for the position is still valid. Time spent running losers is an inefficient use of trading capital so optimally you are best taking the short-term hit and then re-entering at a more beneficial entry + it's less stressful and you'll have hair when you become a billionaire

 

[zupcon]

The Statistical evidence I have suggests common advice works far better than unqualified opinions.

If you have a positive expectancy and stop losses in place ,there is no reason why not to average down.This information on positive expectancy will only be available from backtesting.Write up some code and start backtesting over many instruments over many years, you will truly realise how wrong they were.

For anyone whose serious about this stuff I'd recommend a nice article by a guy named Michael Gutmann where he details a statistical method of looking at the effects of scaling in and out, including averaging down into an entry.

Oily is right, most trading "wisdom" is just plain wrong.

 

[robster970]

Averaging down may work for some highly experienced traders, it does not mean it will work for you.If you are new to trading stay away from this type of trading.It is only for people who are highly skilled.

Here is a disaster !

http://www.financevisor.com/default.aspx?g=posts&m=818035

You sound like my mum now.

Incidentally, what is your experience of averaging down? Have you used it anywhere? Do you know from experience that it is bad?

 

[oildaytrader]

You sound like my mum now.

Incidentally, what is your experience of averaging down? Have you used it anywhere? Do you know from experience that it is bad?

My friend taught me averaging down , he was my worst enemy.I listened to this idiot and I blew GBP50,000.

During 9/11 he blew gbp 500,000 averaging down on ftse from 6700 to 5300 , Dow from 9500 to 7000 and Nasdaq from 3500 to 1700 .His pants were wet .He thought they would never go so low.

If I had learnt how to trade properly , I would have made big money during 9/11.This averaging down friend goes to the casino and says "last 6 were red , so I will bet black,7 reds do not happen"This averaging down is gambling.The ftse will never go to 3,000 is gambling bet.period.

O D T

 

[robster970]

Ouch. Good job you ditched your 'tutor'.

I can't see myself doing anything that stupid - I'm too tight, I'm a northerner.

 

[shadowninja]

As I hinted earlier, it depends on the reason why you do it. I've seen newbies ruin accounts doing it. I've seen pro-traders make a killing doing it (probably taking the money from the newbies ).

 

[glyder]

I like this thread, glad some one brought it up, thanks robster......I began averaging down after trading for a while, I kind of felt guilty about it because it goes against everything I was taught ......"losers average losers" etc.. but I was actually averaging winners, so I stayed with it. It happened almost instinctively, generally when i made an entry too early but was still sure of the trade going my way.
Anyway as time went on, I found myself starting to get hopeful on losing trades and less able to distinguish between averaging down on a winner and getting false hope on a loser. So for the time being I have given up on it until I can use better judgement, but I definitely see it as a strategy that can work.

 

[songcon]

This the first 2 of the 6 pages of a paper to introduce technical analysis. The first section (Section A) is used to present the benefits of riding the winners, and get rid of the loosers. Chart A3 is an added to provide an additional example

PART A: BUY A STRONG STOCK AND LET IT GROW OR SELL AND PRESERVE THE CAPITAL:

A1: USE CHARTS TO SELECT STRONG STOCK AND OBSERVE THE 50-SMA RULE TO WATCH THE CAPITAL GAIN KEEPS GROWING:

Chart A1: MSTR 6-month daily chart with 50-SMA (Simple Moving Average)
To use 50-SMA crossing as a buy or sell signal would help investors greatly especially in dealing with stocks that have high RSI. Investors who purchased MSTR on the crossing of the beginning of Apr. 2009 and kept on riding the gain all the way since there was no appearance of sell signal . More than 75% gain on this purchase

A2: USE THE VERY BASIC TECHNICAL TOOL TO HELP TRADERS TO GET OUT OF THE POSITION AND STAY PUT UNTIL REVERSION SIGNAL APPEARED:
Buy when the stock crosses the 50-day SMA (Simple Moving Average) and sell (and stay put) when it crosses into the other direction

Chart A2: TASR 5-yr weekly chart with 20-EMA (Exponential Moving Average)
Selling on signals to protect loss. Investors who observed the crossing over of the 20-EMA as a sell signal would minimize the loss when TASR price crossed the 20-EMA at $23. Assume that the investor placed the sell order @ $22/share in Jan. 2005 and stayed on the sideline until early Nov 2005 when there was a buy signal when the price crossed the 20-EMA @ $8. Protection from a $14 per share loss. The sell signal through the crossing down in Jan 2008 from $14+ to save the continuing drop in price to $7 in early Aug 2008 when the signal reversed also saved the investor a great deal for staying out of the down-fall of the stock

One more example of a weak stock can stay weak for a long . . . long time and burns hole in your pocket if you don't cut loss early on.

Chart A3: SDS NOV YTD with 50-SMA
SDS has lost 2/3 of the value from its height and still keeps going down

 

[counter_violent]

:help: Where's my paracetamol.

 

[songcon]

:help: Where's my paracetamol.

Could you express it in "easy reading" English so that I can make a decision to please the Global Moderator

Thanks

 

[robster970]

I think the conversation had moved on a little from execution based purely upon technical analysis.

I suspect the colour scheme was not to the moderators liking as I understand he likes soothing pastels on his screens rather than bawdy fluorescent greens.

 

[robster970]

So, I scaled in/averaged down/spawned the devil again yesterday when E-Mini tested 1101 although I missed the low and caught it at 1102. I watched it touch just shy of 1110 last night before Nikkei opened and thought that I would stay in instead of taking 18pts. The reason I've stayed in is because the 12 month high has not been tested again and the high's are usually tested before a reversal/retracement occurs on the 1d timeframe in my experience.

I'm looking at todays retreat and thinking to myself - 'Am I about to get bitch slapped?'

Quite enjoying this really. Nice to be experimenting rather than being formulaic even if I do stand to lose 6% of account on this trade if it goes south. At least I feel like I'm learning something and I feel like I've had more trading epiphanies in the last 4 days than I have in the last 4 months.

 

[SimpleTrader09]

The thing I don't get about averaging down is this:

Could you not just get out of that first losing position, and re-enter at a better price accounting for the spread? The spread will probably only cost you a few pips. So from that losing position, you only need it to go down a few pips or more, and it would have been worth exiting. If you can get in even lower, then even better.

 

[robster970]

I entered at 1103.1 which is where the original high was. 1100-1101 have been tested 3 times over the last 2 days, which is a 2-3 pt loss.

Are you saying lose 3pts and re-enter at the tested resistane level?

Why do this when I could scale in knowing the tested level is solid(ish) and take more points by increasing the number of contracts in play? Sure my risk for the trade is larger but what is the real risk here if I have greater certainty of support at 1100

 

[virtuos0]

The thing I don't get about averaging down is this:

Could you not just get out of that first losing position, and re-enter at a better price accounting for the spread? The spread will probably only cost you a few pips. So from that losing position, you only need it to go down a few pips or more, and it would have been worth exiting. If you can get in even lower, then even better.

You would be correct if you had entered your full position initially, but the point of scaling in is that you initially enter a fraction of your position and then, depending on how the market moves, you can add if you wish.

Essentially think of it as expanding your options. If you enter your full position (in terms of the risk you are willing to take) straight away then you have two options, either do nothing or reduce your position. When you scale in you add a third option which is to add to your position.

But of course you do need to realise that scaling in may increase your transaction costs, so you need to weigh up which is more important to you, being able to fine tune your risk and potentially getting a better price, or having a cheap transaction cost.