Stop loss and averaging down

Pat494

Well-known member
Mar 27, 2004
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#1
I would like to hear from members what they think of averaging down.
I know the perceived wisdom is NOT to touch Martingale systems with a barge pole but the hard facts of trading may make it necessary.
As it seems necessary then I am experimenting with averaging down by:-
1 times
2 times
3 times
4 times
And then setting a standard stop loss to cover in case it all goes down the drain.

What do you think ?
 

Hoggums

Well-known member
Jan 24, 2006
2,170
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#2
Ibut the hard facts of trading may make it necessary.
NEVER EVER EVER.

It's one of those techniques that works for weeks/months until it doesn't. And when it goes wrong you are back to square one having lost all of your profit accumulated over that period.

Don't go down that road - you'll be sorry. The market is not always random and can push on in a single direction far longer than you think is possible. If you are on the wrong side of that trade you'll lose your account trying to average the position down.
 
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tomorton

Well-known member
Feb 28, 2002
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#3
I only enter/exit on TA signals, not accrued gains/losses, so its basically a No from me.

However, there could be a rare situation where my first trade is losing but has not hit stop, and a new buy signal comes in from the chart. Its possible, and under that scenario I would be a buyer at a lower price of a new position of equivalent size in the same market. But its not really doubling down, I would treat them as separate entities.
 
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Pat494

Well-known member
Mar 27, 2004
13,030
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#4
I only enter/exit on TA signals, not accrued gains/losses, so its basically a No from me.

However, there could be a rare situation where my first trade is losing but has not hit stop, and a new buy signal comes in from the chart. Its possible, and under that scenario I would be a buyer at a lower price of a new position of equivalent size in the same market. But its not really doubling down, I would treat them as separate entities.
Yes - nicely safe.
 

sminicooper

Well-known member
Jun 13, 2016
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#5
I would like to hear from members what they think of averaging down.
I know the perceived wisdom is NOT to touch Martingale systems with a barge pole but the hard facts of trading may make it necessary.
As it seems necessary then I am experimenting with averaging down by:-
1 times
2 times
3 times
4 times
And then setting a standard stop loss to cover in case it all goes down the drain.

What do you think ?
Go back over all your old trades and see what would have happened had you done the above. Then look at the evidence. Then draw a logical conclusion.

It all depends on your trading style and the length of period that you examine and the state of the markets – so there are quite a lot of variables there. I did this as an exercise with my trading some time ago (not from an averaging down point of view) but just to see what would have happened to trades that I thought it was best at the time to get out of. The one thing that came out of this which I wasn't really expecting was that there was a certain percentage of loss on any particular trade, beyond which I was more than likely not to gain anything by remaining with it. Now, any trade which reaches that loss percentage is now very suspect and in normal circumstances I will get out.

The good thing about doing post trade analysis (and any research for that matter) is that sometimes it throws up things that you weren't looking for or conclusions that you didn't expect.

My suggestion is to get out the spreadsheet and get calculating. :)
 

tomorton

Well-known member
Feb 28, 2002
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#6
Good suggestion sminicooper. I did a rough and ready look-back in December at my 2016 trades. There was a very clear division - if running loss stayed at less than 50% of initial risk, the position would probably not be stopped out within any sensible time period - it might make a small profit or a small loss but would not make a TP at the same distance from entry as the SL either - but if loss reached more than 50% of my risk, it would almost always go on to hit the stop-loss.
 

aag100

Active member
Jul 10, 2010
611
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38
#7
I would like to hear from members what they think of averaging down.
I know the perceived wisdom is NOT to touch Martingale systems with a barge pole but the hard facts of trading may make it necessary.
As it seems necessary then I am experimenting with averaging down by:-
1 times
2 times
3 times
4 times
And then setting a standard stop loss to cover in case it all goes down the drain.

What do you think ?
ive averaged down ..........9 times losing triple digits.now i allow myself 3 times.if i cant get it back and i am on the wrong side of the trade i look to get out at an opportune time.still might cost me double figures but not triple!
 
Mar 20, 2017
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#8
Did you only do one-way averaging down? I mean just buying at a lower price than your entry and wishing it will go up later? That's not the way institutions/funds do it. They average down and then resell the shares they've just bought at a price that is a bit above their latest entry, 1%-3% maybe, but lower (or higher, if they're lucky) than their first entry. It's more efficient, because you have not only a lower cost/share but also an extra amount of cash.
This only works when you have uptrending stocks. For downtrending stocks, the only best thing to do is to cut losses.
 

Pat494

Well-known member
Mar 27, 2004
13,030
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223
#9
An alternative is to put the last trade the other way. I think 4 may be too much to me as an adverse to losses sort of person. So
1st trade
1 times
2 times
3 times but a reverse trade.

Does that make it better ?
 

Pat494

Well-known member
Mar 27, 2004
13,030
1,218
223
#10
An alternative is to put the last trade the other way. I think 4 may be too much to me as an adverse to losses sort of person. So
1st trade
1 times
2 times
3 times but a reverse trade.

Does that make it better ?
Of course it will reverse sometime but will it be soon enough ?
How about
1st trade
2 times but reverse trade
 

Pat494

Well-known member
Mar 27, 2004
13,030
1,218
223
#12
I would like to hear from members what they think of averaging down.
I know the perceived wisdom is NOT to touch Martingale systems with a barge pole but the hard facts of trading may make it necessary.
As it seems necessary then I am experimenting with averaging down by:-
1 times
2 times
3 times
4 times
And then setting a standard stop loss to cover in case it all goes down the drain.

What do you think ?
Luckily I am on a demo account and would have been deep under water with the above system so I have restricted it to:-
1 times
2 times
out on a stop of only 100 points ( 10 pips ) with each separately.
 

aag100

Active member
Jul 10, 2010
611
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#13
Luckily I am on a demo account and would have been deep under water with the above system so I have restricted it to:-
1 times
2 times
out on a stop of only 100 points ( 10 pips ) with each separately.
I had you down as a senior member of the community.your now degraded to senior demo trader.
 

Jason101

Well-known member
Oct 9, 2008
1,357
212
73
#16
It's a great idea

I would like to hear from members what they think of averaging down.
I know the perceived wisdom is NOT to touch Martingale systems with a barge pole but the hard facts of trading may make it necessary.
As it seems necessary then I am experimenting with averaging down by:-
1 times
2 times
3 times
4 times
And then setting a standard stop loss to cover in case it all goes down the drain.

What do you think ?
What do I think?

I am not quiet sure why you are asking me or anyone else?

If you think it will work and you have tested it enough and it is within your risk parameters and it produces profit from testing, why would you not? It's a no brainer.

If your risk tolerance is say 2% per trade and you want to add to the position 4 times and each part is 0.5% risk then it seems a very safe and sound way to trade.

But if you are saying you usually trade 2% and now you want to trade 2% per part of 4 additions of an averaging down process to total 8% per trade I would say that this is a greater risk than a lot of people would be willing to take.
But if this is within your risk profile and you are willing to accept a greater risk of blowing your account for the potential of growing your account at a greater speed, then that is your decision, if so it would be wise to have a get out and stay out amount.

I think the big question for someone like yourself who has been around for a while, is why are you thinking about this at the moment. Are you temporarily frustrated with the current market or your trading or is there something else going on in your life which is impacting your trading?
If so you may do better to take a break or scale down or try a new approach.

If you are saying that the sum total of all potential additions will not exceed your usual risk. Then go it, it is probably safer than risking your usual amount in just the one entry. It buys you the right not to be perfect on entry timing.
 
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bootsyjam

Active member
Sep 27, 2006
220
19
28
London
#17
I would like to hear from members what they think of averaging down.
I know the perceived wisdom is NOT to touch Martingale systems with a barge pole but the hard facts of trading may make it necessary.
As it seems necessary then I am experimenting with averaging down by:-
1 times
2 times
3 times
4 times
And then setting a standard stop loss to cover in case it all goes down the drain.

What do you think ?
There's quite a simple answer to this. You are averaging down/opening a new position at an area where you feel that buyers (if your original position is long) will be looking to enter the market, stop the price from dropping, and then raise the price.

So the first point is whether these areas that you are picking are areas where this is likely to occur.

Which leads to the second point, which is that averaging down can theoretically work in a range bound market. Price moves are capped and they keep oscillating within set ranges.

But it is vital to point out that an averaging down strategy will kill you on a trend day. Any small gains you might make on other days will destroy you. Think about it, if your original position is long and you're averaging down on a trend day where prices drop continuously, all you are doing is causing huge losses. Not only is your.original position way out of the money, all your new positions will be too, and as it's a trend day then these price moves are extended which lead to even bigger losses.

There is also the simple issue that instead of making easy money on a trend day, you've been absolutely hammered instead.
 

aag100

Active member
Jul 10, 2010
611
35
38
#18
There's quite a simple answer to this. You are averaging down/opening a new position at an area where you feel that buyers (if your original position is long) will be looking to enter the market, stop the price from dropping, and then raise the price.

So the first point is whether these areas that you are picking are areas where this is likely to occur.

Which leads to the second point, which is that averaging down can theoretically work in a range bound market. Price moves are capped and they keep oscillating within set ranges.

But it is vital to point out that an averaging down strategy will kill you on a trend day. Any small gains you might make on other days will destroy you. Think about it, if your original position is long and you're averaging down on a trend day where prices drop continuously, all you are doing is causing huge losses. Not only is your.original position way out of the money, all your new positions will be too, and as it's a trend day then these price moves are extended which lead to even bigger losses.

There is also the simple issue that instead of making easy money on a trend day, you've been absolutely hammered instead.
And there comes another conundrum.you know if you've been ok in a range bound or been hammered in a trend only at the end of the day.
 

seekingTruth16

Active member
Nov 25, 2016
149
24
28
#20
I would like to hear from members what they think of averaging down.
I know the perceived wisdom is NOT to touch Martingale systems with a barge pole but the hard facts of trading may make it necessary.
As it seems necessary then I am experimenting with averaging down by:-
1 times
2 times
3 times
4 times
And then setting a standard stop loss to cover in case it all goes down the drain.

What do you think ?
What does the 2nd position get you that the first couldn't? Are you thinking that the second trade is a better trade because it's at a better price? How about you only take the trade at the point you would double your position. Wouldn't that be better, and you could even trade double the size on this trade that has an improved chance.

To me this is 4 trades. If they are good trades that your tests have shown are likely to make you money, then there's no problem. But if they are just gambles with no positive expectancy and you're just hoping probability will ignore that and save you, then I don't think it's a good idea.
 
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