Learning from a spanking

bredin

Member
80 20
By now everyone should know the axiom 'never add to a losing position' which is true for the most part, especially in a levered environment like spot forex, but not so true in an unlevered environment where one is investing for cashflows (dividends) in the long term where the worse price represents better % returns.

[please note that trading and investing will not be used interchangeably by me as they are fundamentally different processes with fundamentally different goals]

In case someone doesnt know averaging down is an accounting trick used to make traders feel better about making crappy entries and to (theoretically at least) make it easier to recover floating losses from such poor execution.
It does this by increasing size so price doesnt have to move as far (ie back to the original entry) to get back to breakeven.
It has an inherent problem: that being if youre still wrong you now have a bigger size moving in the wrong way: the spanking gets bigger the wronger you are. Exponentially so if one keeps adding.
You can see this process on those nice sites that display a traders results on a nice graph: the floating equity line drops below (often way below) the closed equity line.

In a levered market this can lead to a visit from Mr. Margin Call in very short order.

However theres a bright side to this.
First a quick overview of the average down process:
1. bad trade
2. add hoping for a return to b/e
3. sometimes price runs and you get spanked

Does anyone see from this the bright side yet??
Probably not, since ive obfuscated via context.

1. good trade
2. add and normalize risk
3. sometimes price runs and you do the spanking

By this i do not mean 'buy when your system says sell.'
I mean that when you take a trade at a good place on the chart, knowing where youre going (ie, not a "tp 30 pips" 'system'), with a bit of held (floating) profit add size, move your stop (or equivalent process) to normalize risk. Mabee add again and normalize to b/e (or +risk%, they'll be in roughly the same place) then get out where you were intending in the first place.

A few markups will show you that 1:1 RR trades can be turned into 50:1 (or more) with the second add securing the 1:1 you initially wanted anyway, and you dont have to get it right very often to make the kind of profits that some would call 'just plain stupid'

Now, who got spanked Martingailing and thought the lessen was merely 'Dont Martingale?'

B.
 

billyjean

Active member
120 5
nice and smooth way of thinking. spank with markets, with adding more lot to get near your target. the question isn't lays with how much money can you get, but how much money you had!
there's no bright side while increasing lot upon losing trade.
if you keep with the profit scenario, there's no end of it. but you never put a view of how lot increasement trade always put an account into higher risk. how you overcome this situation ? by adding more margin ?
 

bredin

Member
80 20
Point 2. Add and Normalize Risk.

During the average down one normalizes expectancy to breakeven by shifting the TP. You normalize risk by moving the SL (or equivalent) towards price so that the same amount of money is lost if price comes back.

kind of like a trailing stop, but your only allowed to do it when you add lots. Thus while risk does cannot increase, profit can.

And yes you get taken out at b/e or -risk sometimes but this is more than made up by the times you do get where youre going.

As stated this is not something to just layer onto a MAx 30 pip target kind of system, but rather an idea around the axiom "if you can see loss, you can see profit" and the reason why adding to a losing position is bad.

Go do some markups, I'm on holiday :)

B. (but will post some markups of my own in a few days)
 
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bredin

Member
80 20
Big chart reason to trade


Small chart activity


Note that risk never increases, even though lotsize is.

This is also some pretty rough and ready entries basid on "price is within 30 pips of where i want it." this example could have been done on 20 or 15 pips and the gains would have been in the pipe dream category for 99.5% of retail traders.

As stated originally, if you get taken out at some point, it doesnt matter since:
a) decent risk management (trade planning) determines the places to enter and
b) the fail rate can easily approach 95% and still make serious money.

B.
 

bredin

Member
80 20
Its hilarious to me that you get not one reply :)

Its normal to post trade methodologies that are beyond the capacity of the average forum denizen to understand, even with humorous overtones.

Its the same reason most of them will never make any money.

Sad, but true.

B.
 
 
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