Why does nobody average down?

[trader_dante]

Here's a technique that gets little playing time: Pyramiding up. TD, maybe you knew a few traders who did this also?

Of course. This is the way you make big money.

But many people can't do it because as soon as they are in they want to know where they are getting out and securing their money.

Why do you think the breakeven stop is so popular?

 

[trader_dante]

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.

Hey Split,

Sorry if I sounded harsh. I respect your opinion as I respect everyone that has something to add whether I agree with it or not.

I don't know whether all top traders average down. I just know that the biggest and arguably most successful ones I worked with did and I've read about quite a few more that do this as well.

But I accept that for those that do there are just as many professionals that say it's not a good thing to do and advise one not too. I guess like everything else it is just finding your own way.

I told the story in another thread on here of how once I had a long position in the Yen that was offside and one of the bigger traders came to me and asked me if I was going to buy some more. I looked at him like he was mental and told him that since I was offside and wrong there was no way I was buying more and throwing good money after bad.

He then just nodded and walked off with the kind of smile you give when you realise someone is two pills short of a full medicine cabinet and you want them to know you think that but don't like to say it....

Personally I can't bring myself to do it but if I've seen it work for others then of course I will share that info. And that brings me back to the story about knowing and doing. I know it works for some and I can advise that - infact I can teach how I've seen it done but can I do it myself? Nope. It usually results in me losing big.

 

[Splitlink]

I should know, at this stage, how to put forward an opinion without offending those who are trying to help. Sadly, my ego is, at least, as big as everyone else's. So I apologise for saying something that was not true. I have learned a great deal from what I have read on these threads and I have high hopes of learning more as time goes on.

Having said that and to get the thread back on track

Averaging down ain't no good for most of us

 

[Shakone]

Well I don't believe for a second that all top traders average down, though I can believe that some do. When it is mentioned that the top traders you knew averaged down, well that might be true. However, the best traders that most of us are likely to meet or work with, are not likely to be the 'top traders' of the world. When you read the market wizard books, it is almost unanimous that you should cut your losses. I didn't read too many averaging down stories in there. If you average down you can probably come out of it well most of the time. But it will only take a day like we had recently where the Dow dropped almost a 1000 points - with little retracement for about 600 of those - to wipe someone out. Of course you can limit your losses with averaging down, but then I have to agree with Timsk, that when you in you'll win small, and when you lose, you'll lose big.

Averaging down to me is built on a misconception, that unrealized P/L is different to realized P/L. Isn't this just an unwillingness to accept losses? You have already lost though, that losing trade is not related to the next trade where you double up at a lower point. THAT first trade was wrong, the second one might be right, and make up for the first, but that doesn't mean you shouldn't have exited the first trade at an earlier point, where your edge tells you to.

Two scenarios:

(i) Your trade is still running, and you are down X pips, but you are still in a trade where the market proved your entry was not ideal.

(ii) You were stopped out for X pips (or less), and now have the option of entering again and being in situation (i) if you wish, or possibly entering at a better price where your edge is present.

Personally, and I believe logically, scenario (ii) is better. If you accept that, then averaging down is not a good idea. Better to get stopped out, and enter in double the size at a lower point where your edge is present. Of course if it works for you, it works, and stick at it.

 

[Shakone]

Example (when it works)
(i) I enter at 100, price goes down to 70, and I average down at 70. Price then comes back to 90, and I have made 5 x 2 x initial stake per point=10 x initial stake per point

(ii) I enter at 100, get stopped out at 85, enter double initial stake at 70, and price comes back to 90, then I have made
-15 x stake + 20 x 2 x stake = 25 x initial stake pp

Example (when it doesn't work)
(i) I enter at 100, price goes down to 70, and I average down at 70. Price then goes further down to 50, and I have lost 35 x 2 x initial stake per point= -70 x initial stake per point

(ii) I enter at 100, get stopped out at 85, enter double initial stake at 70, and price goes further down to 50, and I have lost -15 x stake - 20 x 2 x stake = -55 x initial stake pp

Of course, doubling stake can get into martingale issues, but so does averaging down, and it seems clear to me which is better.

 

[robster970]

(ii) You were stopped out for X pips (or less), and now have the option of entering again and being in situation (i) if you wish, or possibly entering at a better price where your edge is present.

This isn't averaging down though is it? This is just executing a trade because you (a) still believe you have an edge and (b) doing it because the stop on your initial trade was too tight and (c) applying martingale as MM. You are not adding to a losing position that is still running.

The only place I can believe that averaging down would work is if price is rangebound and mean reverting. I've tried it, am no good at it but can believe that others in this scenario can do well with it.

 

[Shakone]

Yea exactly, it isn't. It is better than averaging down. Trying to make the point that it would be better to take the loss, and re-enter further down. So why would you want to do averaging down (scenario (i), when you could do (ii)?)

 

[robster970]

Sorry man - I missed the point you were trying to make. I've collided in violent agreement with you. Taking the loss and re-entering is where it's at IMO.

 

[Chartsy]

well guys i'm starting a blog up http://chartsyfx.blogspot.com/2010/05/details.html check it out at the least going to post there, get a focus going

 

[Splitlink]

Sorry man - I missed the point you were trying to make. I've collided in violent agreement with you. Taking the loss and re-entering is where it's at IMO.

Me, too. Read my posts 3,5 and 9.

 

[wackypete2]

So we are all in agreement that some of us disagree with the generally agreed upon principal that most of us just don't agree?

Peter

 

[RockyRacoon]

Do me a favour, explain to me in detail what averaging is, can you do this? I want to know about stops, entries, targets, MM etc etc.

Explain what this averaging is, can you do it, can anyone on this site do it?

Averaging or scaling into a position is a strategy in trading that when done properly, is very powerful and can exponentially increase your profits, it can also keep you out of losing trades - or when improperly applied can hand you your head on a tin platter like it did to me for a long time!

It’s all about risk management, so with that in mind, I will outline only one method of how to properly scale into and / or out of a trade.

1st: I am speaking about a day trade, not a swing or any other type of trade, tho I suppose the same methods can apply.

2nd: You need an account size that will allow you to scale into a trade and possibly take a “little heat” for a bit.

3rd: Do not attempt this method if you are trading Counter Trend or a non trending market or you WILL get killed! You only trade this method in the direction of the trend – that means WAIT FOR A PULL BACK to an established support or resistance area.

4th: Start your first position small, very small. Remember that this is a strategy where you are confident that you are on the right side of the trade – and reasonably close to the best possible entry – but you are admitting that you just may not have the best entry. Rather than miss the trade completely should it move immediately your way, you choose to open ONLY A SMALL POSITION initially, then scale in at better prices should price go against your initial entry. Remember that you took the trade on a pullback because you expected for the trend to resume and were willing to accept only a small profit.

It is a strategy, much like any strategy that one needs to practice imo.

Of course, if you’re able to consistently enter at the best possible locations, then jump right in there with a full position and exit with a profit – or stop out with a loss - by all means do not scale in.

My .02

 

[Brand]

LOL

i postedt this on another forum and have got some interesting response.

Why do traders think they know when a pullback will end, why do they try pin point the exact reversal?

Why not average down (actually double down) into the pullback itself?

'Your account gets wiped out if you're wrong once'
Actually that's wrong, calculated averaging down has a limit, i personally average down until i see the pullback as done, and i use a stop loss on all my orders which sums up to 2-3% of risk. Random averaging down is silly, as in buying at support, it cracks and you keep adding and adding and adding.
But i think it helps to accept we aren't perfect on entries, averaging down gives that fleixibility, plus you may catch winners which you wouldn't have caught had you tried to 'catch that pip' which is the reversal, rather than just 'ooh support it's going up BUY, resistance SELL '[/QUOTE]

 

[Splitlink]

Coming back to professionals, I suppose that they deal with so much money that they can't do it all at once. My way is much easier..trade with peanuts.

 

[RockyRacoon]

LOL

i postedt this on another forum and have got some interesting response.

Why do traders think they know when a pullback will end, why do they try pin point the exact reversal?

Why not average down (actually double down) into the pullback itself?

You seem to think averaging = doubling down. Personally, I would say that's one of the improper ways to average - but that's just me.

Anyway, there really is no way to know when the pullback will end, but this thread is about averaging - and to keep from getting killed 99% of the time averaging, its all about trading with the trend.

Trading with the trend always enjoys the highest probability of success, is most forgiving and scaling in can be very profitable - if you scale in properly.

 

[Brand]

You seem to think averaging = doubling down. Personally, I would say that's one of the improper ways to average - but that's just me.

Anyway, there really is no way to know when the pullback will end, but this thread is about averaging - and to keep from getting killed 99% of the time averaging, its all about trading with the trend.

Trading with the trend always enjoys the highest probability of success, is most forgiving and scaling in can be very profitable - if you scale in properly.

"if you scale in properly. ".....so someone.. Please tell me how to do that...

 

[RockyRacoon]

"if you scale in properly. ".....so someone.. Please tell me how to do that...

.....4th: Start your first position small, very small. Remember that this is a strategy where you are confident that you are on the right side of the trade – and reasonably close to the best possible entry – but you are admitting that you just may not have the best entry

You see a great support on the daily chart at .0035 but price is looking like it won’t pull back that far so you enter with 1 lot at .0040 and wait………….ok, now price is looking weaker and falls to .0036 so you buy 2 more and are now holding 3 longs at an avg price of .0037 - - a better price than your initial entry - so be happy.

Now you are $3.30 in the red vs $3.00 had you not scaled in……………but wait! ………it’s a shake out and price falls to .0033 and you grab 6 more effectively putting your average entry price at .0034 – you now have an even better avg price, but now you have 9 lots and maybe $10 in the hole till price pops up. Had you not added the last 6, you would be down 4 pips x 3 lots = $8.00ish in the hole anyway till price pops back up.

Now you have some options to limit your risk as the trend resumes. (Remember that you took the trade because you expected for the trend to resume). You can scale out or you can hold the whole position for however many pips you can get. But you traded WITH the trend, started small and were willing to take only a small profit if price had moved your way immediately. In other words, you managed your trade. Perhaps you got out with a 1 pip gain as price tested previous support - you still would have made 9 pips. Had price fallen further, depending on your pain threshold or account size, you could keep scaling in – or bail asap and take your lumps.

When you trade with the trend, the expectation is for the trend to resume - that is why you entered the trade in the first place.

 

[Brand]

'A fool and his money are soon parted'

 

[RockyRacoon]

'A fool and his money are soon parted'

Same goes for traders who fail to manage their trades

 

[Chartsy]

Rocky i agree with what you are saying here, except i usually don't wait for the pullback, i actually say ' right we are ABOUT to have a pullback' and set buy limits etc. I strongly agree with starting small.

I have rules: only average down in a pullback with the trend, even if we are in a range/consolidation

second rule is that if there is no trend and we have a range then i buy support (and sell resistance) except with small size, rather than say oo risk 2% at support, i'll risk 0.2%, and setting buy stops above my support buy.

edit: of course if i slept in and i wake up at support in an uptrend ill do the same