Why does nobody average down?

[trader_dante]

Hi Tom,
That's my understanding too - about the pro's I mean. But they have the funds to hedge their positions in other markets, thus enabling them to stay in trades long after diddly spit retail traders like me have blown their accounts.

Tim,

From what I've seen they don't really hedge.

Most of the guys I worked with just had a very good sense of the market so although they often averaged down and didn't use stops they wouldn't, for the most part, be doing it recklessly.

The amateur, as most of know the hard way, don't use stops because they are afraid of losing and they average again because they are hoping and praying the market will come back - again to avoid the pain of losing.

With the pros I sat with, the reason they didn't use stops was mainly due to two things. Firstly I think it was due to the fact that a spike caused perhaps by large size or lack of volume in some of the thinner markets like the FTSE could cause a "blip" of a few prices that they would consider unnatural and thus not want to be stopped out on.

Secondly because I think a lot of them used the order book to get a feel for where things are going. Charts allow us to use a pre-ordained stop because we can see where we are wrong but trading off the order book this is much harder. So I think they get in the market based on an idea (as we all do) with no initial stop and then average until that idea is wrong and then as soon as they know it is, they just get out.

Believe me I found it so weird how they did those two things (didn't use stops and averaged) because I was always taught to associate them with lack of discipline. However, these guys that did them were some of the most disciplined people I have ever known.

I knew guys that would sometimes make a mistake (e.g. do a few more lots than intended) and just instantly cut it for a loser. Like without even looking to see if the market might go their way. In similar circumstances I have to admit I would be inclined to see if it might go my way before I would cut it. They just took their losers and got out straight away.

It was a real eye opener.

 

[trader_dante]

I know this thread is on averaging but the other thing I would say (and it relates to risk management) is I never sat with a professional that bothered working out what 1% or 2% or 3% of their account was and then worked out where their stop would be and then worked out how many lots to do. They just traded an amount of lots they were comfortable with (and this was also related to the probability of the opportunity infront of them) and then just hit buy or sell. I would bet everything I own that 99% of prop traders do not know exactly how much of their account is at risk on any trade. It's always a very rough approximation and it varies due to what the market does.

 

[Splitlink]

I know this thread is on averaging but the other thing I would say (and it relates to risk management) is I never sat with a professional that bothered working out what 1% or 2% or 3% of their account was and then worked out where their stop would be and then worked out how many lots to do. They just traded an amount of lots they were comfortable with (and this was also related to the probability of the opportunity infront of them) and then just hit buy or sell. I would bet everything I own that 99% of prop traders do not know exactly how much of their account is at risk on any trade. It's always a very rough approximation and it varies due to what the market does.

Well, they are professionals, otherwise they wouldn't last very long. I don't try to do anything but the simplest trade setups. My stops are arithmetical and if I get caught in a spike, hard luck, I must get back in again.

I've done a lot of reading of these threads and have come to the conclusion that, most of the time, a line can be drawn to justify it, leaving the hapless trader to say "Hell, why didn't I see that!"

 

[kimo'sabby]

I know this thread is on averaging but the other thing I would say (and it relates to risk management) is I never sat with a professional that bothered working out what 1% or 2% or 3% of their account was and then worked out where their stop would be and then worked out how many lots to do. They just traded an amount of lots they were comfortable with (and this was also related to the probability of the opportunity infront of them) and then just hit buy or sell. I would bet everything I own that 99% of prop traders do not know exactly how much of their account is at risk on any trade. It's always a very rough approximation and it varies due to what the market does.

If i were a prop firm i would know exactly how much my trader was risking,.....even if my trader did not.


As an employer, i would only take-on the most proficient.

 

[Chartsy]

Exactly, go into a proprietary trading firms and the top traders grasp the concept and understand it, i know some VERY good traders who do it. There are stupid ways to do it too

Also a big difference you'll see is that professionals use put options instead of stop losses (going long )

 

[Chartsy]

Scaling into a position has always made a lot of sense to me. The market doesn't give two hoots about the specific price levels where each of us draws our respective trendlines and S&R lines etc., so, working a zone of resistance or support is both logical and sensible. The reason why the practice tends to be frowned upon on sites like T2W is that it does require excellent risk and money management skills. Not difficult or complex ones necessarily, rather the ability to place your entry orders in the right place and your stop at a level that's highly unlikely to be hit. And that's the difficult bit for most of us. I've tried repeatedly over the years to integrate such an approach in my trading. However, I've never really got it to work. The reason (in my case) is as follows . . .

Suppose one is buying pullbacks in a longer term uptrend and let's say one sets three limit buy orders evenly spaced apart. For the sake or argument, the middle order is the point one expects the trend to resume. The two orders bracketed either side of it are in case the market doesn't quite reach the anticipated level or, alternatively, overshoots it. Some distance beyond the final order is the stop loss order. In my experience, what tends to happen is that the first order is triggered - but not the other two - and price then moves in the intended direction and makes a small profit. All well and good you might think, but the trade is only one third of its optimum size. The flip side of this is that all three orders are filled - followed by the stop loss making a loss three times as big as the winning trade. Unfortunately, the ideal situation where all three orders are filled and then the market quickly takes the trade into profit doesn't happen very often. The paradox is that if one could be sure that order No.3 would be filled - but not the stop loss order beyond it - then there would be no need for the first two scaling in orders. One could just have a single order at three (or more) times the size and move the stop even further away.

The solution - in part at least - is to have very deep pockets and to continually be scaling in at much lower levels, confident that the market will - sooner or later - reverse direction and at least get one's trade back to breakeven. This is a great way to excel in trading competitions using virtual money to turn $20k into $150k in a single day and win a bottle of very nice wine for one's efforts. However, as I think 'Medbs' has found out on his 100% Holy Grail thread, sooner or later the market gets the 'ump and refuses to play ball. And that's the point one does a Nick Leeson. And none of want to follow in his footsteps now do we!

Tim.

And? this is actually an advantage; had you used a hard entry which probably would have been the middle order yeh? then it wouldn't get filled and you'd miss out. Point of averaging down is that you have a belief of a general direction but know that you can't pinpoint the exact turning point, so you enter in multiple areas, but always trying to bring your average price higher

 

[counter_violent]

If i were a prop firm i would know exactly how much my trader was risking,.....even if my trader did not.


As an employer, i would only take-on the most proficient.

So your not a trader then.....more of a risk manager.

 

[kimo'sabby]

So your not a trader then.....more of a risk manager.

Look, you have five traders using your account, you will soon get onto what they are doing, yes?

Who do you get rid of?

I would get rid of the riskier trader. This surely stands to reason!?

 

[Chartsy]

Look, you have five traders using your account, you will soon get onto what they are doing, yes?

Who do you get rid of?

I would get rid of the riskier trader. This surely stands to reason!?

believe me , the top traders average down, surely you want to keep them? Yeh, most people don't average down....don't most people lose?

 

[counter_violent]

Look, you have five traders using your account, you will soon get onto what they are doing, yes?

Who do you get rid of?

I would get rid of the riskier trader. This surely stands to reason!?

I'd get rid of all of them and replace with good background support staff.

 

[Splitlink]

believe me , the top traders average down, surely you want to keep them? Yeh, most people don't average down....don't most people lose?

Who told you that the top traders average down? Do you know that for sure, or is it going to be another of the myths that float around these threads?

Those who say, don't know and those who know, don't say.

 

[kimo'sabby]

I'd get rid of all of them and replace with good background support staff.

In all honesty, if we had to employ people, then we probably have too much money in the first place.

 

[Chartsy]

Who told you that the top traders average down? Do you know that for sure, or is it going to be another of the myths that float around these threads?

Those who say, don't know and those who know, don't say.

i know a really good trader who knows a lot of really good traders and they all do it. you may choose not to believe me on this one

 

[Splitlink]

i know a really good trader who knows a lot of really good traders and they all do it. you may choose not to believe me on this one

I choose to believe you and stay friends.

 

[trader_dante]

Who told you that the top traders average down? Do you know that for sure, or is it going to be another of the myths that float around these threads?

Those who say, don't know and those who know, don't say.

I say and I do know.

You have to get rid of this preconception that everyone that tries to teach or explain something doesn't know what they are doing. It's total and utter BS.

There is an absolutely huge difference between knowing and doing. And this is where your preconception comes from. Because most of the people that know still can't do.

But just because you can't do something doesn't mean you don't know how to do it.

 

[Rossini]

good post tom

 

[wackypete2]

believe me , the top traders average down, surely you want to keep them? Yeh, most people don't average down....don't most people lose?

Here's a technique that gets little playing time: Pyramiding up. TD, maybe you knew a few traders who did this also? In a nice trending market you can almost print money. In a non trending market you can still hold your own. I knew a few traders who used this approach. Start out buying (or shorting) 1000's of shares in the trend direction and at each pullback add 1/2 of the previous position. Adjust stop. On a nice trend you end up getting stopped out on the smallest trade while gaining big on each of the larger ones. You can stay near flat or slightly positive for a while, then nearly triple your account within a few days. Not for me, but people do it.

Peter

 

[wackypete2]

Since we are talking about professional traders using these techniques I have an question that has no real right or wrong answer, but I'd like to see how people look at it.

What exactly constitutes a "professional trader"? Although I am too humble to ever call myself a professional, can a retail trader be a professional trader? If you can consistently make a living for several years trading decent size, using good M/M and discipline, and being a home gamer, could you be considered one of those "professional traders" that is alluded to here??
I don't see why not, but Interested in some thoughts...


Peter

 

[robster970]

I think it's one of those meaningless labels. You may be retail and very competent providing an income that you are happy with whether this be pocket money or a means to live. Conversely you could be employed by an institution and be 'professional' in that regard but largely be mediocre at best, generally crap and on the brink of being turfed out.

Who would you take advice from and would you qualify the advice based upon competence or the label?

 

[Splitlink]

I say and I do know.

You have to get rid of this preconception that everyone that tries to teach or explain something doesn't know what they are doing. It's total and utter BS.

There is an absolutely huge difference between knowing and doing. And this is where your preconception comes from. Because most of the people that know still can't do.

But just because you can't do something doesn't mean you don't know how to do it.

You could say that I deserved that because I spoke too generally, perhaps, and it was not my intention to deliberately offend.

I can't, for the life of me, believe how a top trader would average down unless he had a batch of orders very close together. These people do trade with an immense amount of money and they test the markets before they enter fully.It is not a question of "how" I would do it. I, simply, would not try to do it for the reasons that I have previously expressed.

What systems and theories that are put down on these threads do not tell everything, therefore they cannot work for most of the readers who try them. An idea, or two, I have gotten from most threads that I have read because everyone should know something but, although they may be right they are only right for the one who knows how to use that method ie. the OP. That is the matter with all systems and, I admit, that I don't know "how" to make them as successful as I would wish and, so, use my own. Whether I am successful, or not, I cannot prove, anymore than others can do so, theirs. It is all a matter of trust.

I know, though, TD, that no matter how many top traders you know, they will not give you their trade secrets and everything you believe is because you want to. So, if you believe that all top traders average down, you go right ahead and believe it.