Quoting radicalmosesDislikedHi, twoblink,
For all the rhetorics on moneymangement you seem to make a comman mistake of equating the theory of stock markets to Forex markets. After reading all your explanations its quite evident that you are the one who doesnt get it.
Akuma did quite a good job of explanation and I wont go into the depths of explaining it again. However I will give you a couple of reasons why you are dead wrong with the math and if you do take time to read and understand it, maybe you will see the other side too.
1) The explanation you have given is quite correct because you cant buy anything under 1 share of the stock, However for forex ,suppose my initial lots to trade is 1Lot, I can break them into 0.5lots for first entry and 0.5 lots on the second trade. Now you do the math again please and tell me I am wrong.
Initial price of entry for example 1.8500 gbp 0.5lots, SL = 1.8400
2nd entry 1.8450 long , SL = 1.8400
Average price is 1.8475
Risk = 75pips against 100pips if I had entered at 1.8500 with 1 lot.
This is just theoritically but the math is there for you to see.
2) All currencies are volatile and we wont see any currency lose all its value in the neartime future unless we have a catastrophy.
Stocks on the other hand are subject to company fundamentals and can go bankrupt anytime. Case in point is Enron.
3) You think averaging down is foolish, mutual funds do it all the time.
Its not what you do but how you do it that matters.Ignored
QuoteDislikedInitial price of entry for example 1.8500 gbp 0.5lots, SL = 1.8400
2nd entry 1.8450 long , SL = 1.8400
Average price is 1.8475
Risk = 75pips against 100pips if I had entered at 1.8500 with 1 lot.
This is just theoritically but the math is there for you to see.
Your math is correct; but your reasoning is not. You are buying at an Average price of 1.8475 now, where as the market is now at 1.8450, so you have OVERPAID. I probably "don't get it" as you say, why overpaying is good. Your example is earmarked with a few assumptions. If I was in 1 full lot (which I wouldn't be, would be in at 0.5 lots) and it dropped to 1.8450, I would exit and take the hit, on half a lot. That's it. I would be at -50 pips, which is as still 25 pips better than your double entry, and I am out of the market now, just in case it kept on dropping, which it might (if it is trending down). I don't know, and neither do you. But I know I have mitigated my risk a lot better than averaging down does.
QuoteDisliked2) All currencies are volatile and we wont see any currency lose all its value in the neartime future unless we have a catastrophy. Stocks on the other hand are subject to company fundamentals and can go bankrupt anytime. Case in point is Enron.
True. But we can see (take a look at the Yen) some +-900 pips. That to me, looks like serious devaluation.. Going from 121 to 10X is DAMAGE in my book.
QuoteDisliked3) You think averaging down is foolish, mutual funds do it all the time.
Its not what you do but how you do it that matters.
Thank you for reminding me why I don't buy mutual funds. Mathematically, averaging down is foolish, it's not a "twoblink" thing, it's a math thing. Second, Mutual fund usually don't allocate something like more than 1% of their funds to any particular stock. Third, mutual fund managers get paid EVEN IF THEY LOSE YOUR MONEY.
Like I said in my book, I am not here to try to convince you. You will average down, I will average up. I have seen the holocost highrises of averaging down. I will shout at the top of my lungs "Never Again!!" You, you are the man of your own fate, if you are happy averaging down, God bless you and I wish you well. I mean that from the bottom of my heart. You do what you need to do to survive, I will do what I need to, to survive. May we have a drink and laugh about it in 20 years when both of us make a fortune.
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