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'Averaging Down Is for Losers' - valid or not?

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  • First Post: Aug 23, 2007 10:02am Aug 23, 2007 10:02am
Does anyone find any validity in the statement below? Doesnt it go against one of the biggest rules of trading: "Dont add to losing positions"...

From Kathy and Boris's new book:

"7. Averaging Down Is for Losers, but Averaging in Can Be the Difference Between Success and Failure

Most traders will tell you that averaging down into a trade is a mug’s game. However averaging in is a strategy employed by a number of our interview subjects to a great success. What’s the difference? Intent. Traders who average into the positions expect to be initially wrong on price and size their trades accordingly. Roland Campbell is one such trader:
That to me is absolutely the key to my success. I average in on
every trade I make and I average out whenever I exit. I have a
tendency where, as soon as I buy a currency, it will dip 10 pips.
Before I would get upset, but now I love it because I feel like I can get in at a better price, so I hope it dips another 10 pips. I know the price I want, so I will average into that price. Roland allows himself about four average ins before he calls it quits. “If it goes much further than four average downs, I have to start considering whether this is the right trade to be in,” he notes, “but nine times out of ten that strategy works for me.” Roland always knows his “uncle point” and unlike novice traders who are never willing to pull the plug on a bad idea, Roland will always stop himself out when a trade goes bad. However, in the majority of the cases, he will succeed in turning a profit on most of his scale in strategies, showing once again that all rules of trading can be broken as long as they are done so for a good reason."
I believe averaging in is valid IF it is truly part of your strategy and not just an excuse to chase bad trades. Sometimes you can get a better average price by averaging in if done with the proper intent and discipline, e.g. not moving your stoploss etc. There is definitley a distintion between correctly averaging in and simply chasing bad trades.
Multiple entries and exits is a topic worth studying and debating.
Quoting billflet
I believe averaging in is valid IF it is truly part of your strategy and not just an excuse to chase bad trades. Sometimes you can get a better average price by averaging in if done with the proper intent and discipline, e.g. not moving your stoploss etc. There is definitley a distintion between correctly averaging in and simply chasing bad trades.
Multiple entries and exits is a topic worth studying and debating.

Definitely worth studying, exploring, and debating!

Anyone have any strategies, comments, or observations on this subject?
Alot of the market wizards talke about averaging in , in particular Bill Lipschutz. I think it would suite fundamentalist best who wanted to build a position.
There is one huge drawback with this strategy - you are trading at your largest position size when you're wrong and quite likely, you'll be much smaller when you are right. This will skew your r/r ratio. It works for Roland Campbell because of his stated high winning %.

In a trading environment there are no rules; you can trade any way you want. There is no correlation between trading philosophies and profitablilty.
Quoting Enroth
Alot of the market wizards talke about averaging in , in particular Bill Lipschutz. I think it would suite fundamentalist best who wanted to build a position.
I disagree, I think all traders, technical or fundamental should use averaging as a trading tool

The question is there one method more effective then another?
Quoting Enroth
Alot of the market wizards talke about averaging in , in particular Bill Lipschutz. I think it would suite fundamentalist best who wanted to build a position.
The difference here is that Bill Lipschutz averages in as the trade goes his way. He is bigger when he is right and smaller as he is wrong.
The way I average is when the price goes my way and I add on 50% retracements.

BUT, if i were to average down, I would do it in small amounts with total position no more than my acceptable risk

for ex. I usually trade 2% of my equity on a trade, but If i was to average down, I would buy .5%, then anoher .5% and another till my overall position is 2%. This is just coming from the top of my head without much analysis.
Working towards CME membership
It really depends on how your model is working, how the market is evolving, etc; there's no "one size fits all" approach (other than you should get out if the behaviour of the market doesn't fit your model, or your model tells you to get out). OTOH, if you assume that some day you are going to have billions to play the markets with, then you should get used to scaling in and out (since it is the most cost effective way of entering & exiting big positions).
Quoting superdezign
Does anyone find any validity in the statement below? Doesnt it go against one of the biggest rules of trading: "Dont add to losing positions"...

From Kathy and Boris's new book:

"7. Averaging Down Is for Losers, but Averaging in Can Be the Difference Between Success and Failure

Most traders will tell you that averaging down into a trade is a mug’s game. However averaging in is a strategy employed by a number of our interview subjects to a great success. What’s the difference? Intent. Traders who average into the positions expect to be initially wrong on price and size their trades accordingly. Roland Campbell is one such trader:
That to me is absolutely the key to my success. I average in on
every trade I make and I average out whenever I exit. I have a
tendency where, as soon as I buy a currency, it will dip 10 pips.
Before I would get upset, but now I love it because I feel like I can get in at a better price, so I hope it dips another 10 pips. I know the price I want, so I will average into that price. Roland allows himself about four average ins before he calls it quits. “If it goes much further than four average downs, I have to start considering whether this is the right trade to be in,” he notes, “but nine times out of ten that strategy works for me.” Roland always knows his “uncle point” and unlike novice traders who are never willing to pull the plug on a bad idea, Roland will always stop himself out when a trade goes bad. However, in the majority of the cases, he will succeed in turning a profit on most of his scale in strategies, showing once again that all rules of trading can be broken as long as they are done so for a good reason."
I think i agree with his strategy! LOL...
Quoting Rolandlc33
I think i agree with his strategy! LOL...
Maybe just a bit of partiality?
Quoting superdezign

Does anyone find any validity in the statement below? Doesnt it go against one of the biggest rules of trading: "Dont add to losing positions"...[color=SeaGreen]

From Kathy and Boris's new book:

"7. Averaging Down Is for Losers, but Averaging in Can Be the Difference Between Success and Failure

Most traders will tell you that averaging down into a trade is a mug’s game....
This approach is also cited in an article by Boris Schlossberg
for SFO (Stocks, Futures and Options) magazine (click the title):

Trade Like a Dealer: (And Avoid Death by
a Thousand Stops)
by: Boris Schlossberg

Excerpt:

Quote
I’ve never heard a kind word from retail traders about dealers. They cheat,
they steal, and they make markets wide enough to drive a Mack truck through.
They back away from their quotes when markets get wild. And on and on
and on. All true, but immaterial....

Instead of hating dealers, traders should learn to trade like them.
Unlike regular retail traders, dealers usually follow two maxims: Always be fading,
and never trust the first price....

There is also a great price chart with that article that shows exactly what he
means (it demonstrates "buying in" to a declining market, with the SL determined
by a breakout bar...
Life happens at the level of events. Trust only movement. - Adler
"Traders who average in to positions expect to be initially wrong..."

I cannot believe this nonsense and just wonder whether this guy is using his own money! When you enter a trade you EXPECT TO BE RIGHT not WRONG, otherwise you would wait until a more favourable position appeared. There is no logic at all in expecting to be wrong.

If price goes against you then it means you are wrong so why add to it? It may be that it is only your timing that is wrong but how do you, a person reading this forum, really know? Better to get out now while you still have your pants and get in again later when price comes back. This sort of garbage is fine for those using OPM (other people's money) but far too risky, no matter how sophisticated your strategy/analysis for retail traders using their own cash.

Why listen to people whose own trading record is so mediocre? These two should stop writing books and get back to basics.
Considering a move to Memphis
Quoting tooloud

I cannot believe this nonsense and just wonder whether this guy
is using his own money! ...There is no logic at all in expecting to
be wrong.

Why listen to people whose own trading record is so mediocre?
These two should stop writing books and get back to basics.

From the article cited in my previous post:

Quote
Tom Baldwin was a former meatpacker who started with a $25,000 grubstake
and became one of the largest market makers in the Chicago Board of Trade’s
Treasury bond pit, often turning over $1 billion of inventory per day.

In an interview with Jack Schwager he said the following,
“Because I’m a market maker, I take the other side of the trend.
So if the market goes one way for 50 ticks,
I can guarantee you I’m going the wrong way...

Granted, you'll have to read the whole article to get the gist of it.
But just because the posters on FF aren't used to dealing with millions of dollars
doesn't mean you should disregard the system they're discussing. The chart
that goes with the article demonstrates it quite well.

That link again: Death by a Thousand Cuts


Life happens at the level of events. Trust only movement. - Adler
Quoting blunderbuss
From the article cited in my previous post:

Granted, you'll have to read the whole article to get the gist of it.
But just because the posters on FF aren't used to dealing with millions of dollars
doesn't mean you should disregard the system they're discussing. The chart
that goes with the article demonstrates it quite well.
I have been using this for over 12 months now but had forgotten that this was the thread that made me start my research on this method of entry.

Granted I am very much a trend trader so have no experience of trying this on the lower TFs but it has proven profitable once you have a clear idea of correct position sizing and how to manage your initial stops.

If you have the attention span of a goldfish this won't work for you, but if you are prepared to hold positions for hours/days, while the trend develops again, it can be very productive.
Quoting tooloud
"Traders who average in to positions expect to be initially wrong..." I cannot believe this nonsense and just wonder whether this guy is using his own money! When you enter a trade you EXPECT TO BE RIGHT not WRONG, otherwise you would wait until a more favorable position appeared. There is no logic at all in expecting to be wrong. If price goes against you then it means you are wrong so why add to it? It may be that it is only your timing that is wrong but how do you, a person reading this forum, really know? Better to get out now while you still...
I utilize the method of scaling in or multiple entries exclusively, and it has made all the difference in my performance. In fact, I believe it was the final piece to my learning. Here is why:

Most to all traders have been taught the single entry approach, whether they are trading one contract, or one hundred. It is the 'single shot' entry, followed by a stop loss implementation they hope will contain the risk they have accepted. These can be highly subjective, or objective. Whatever the case, these stops are seen in the market, and it is common knowledge that they are triggered for their "Merry Christmas" gift providing potential to floor traders.

One first must step back and look at the market stats regarding success of retail traders. Quite grim. 85% failure rate. Thus, the curriculum should be held up to scrutiny.

When a trader places the single trade, they make it harder to be correct than if they allowed themselves multiple attempts. I agree whole hardily that this must be part of the trading methodology, not a last minute refusal to accept a loss mindset. These are a world apart.

I believe the multiple entry approach is superior because it mimics professional entry patterns, who have significant capital to deploy, and must do so without: detection and price impact. Price impact has been shown to be a net cost, as their own orders are moving price away from them. Traders that employ the single entry approach have blinders on to what the overall market is doing, and are not aware of the overall movement, its jigsaw path to profits, indeed seemingly circular movement. The jigsaw path gets them every time.

Professional money knows why and where they are entering, but the difference they are not trying to 'stick it,' make the entire trade in one shot. Too much capital to deploy. They want a area, a price range. Remember, its their game. What they need is - you. The Retail trader is essential, THE required ingredient to make the cake rise.

The retail investor is terrified of having a paper loss or draw down. A couple of ticks and they're taking Maalox. More than that, and they become an insomniac. They cant stare a loss in the face, and the Pros know it. So, if they want t buy, the pros drop price, hard, buy, drop some more, buy some more, drop it further, buy again, until the have filled their line. The trend following public, nurtured on this concept from day one, provides the required opposite side of the trade.

In truth you cannot employ this at all if you are a trend trader because you are buying strength - you are buying at retail levels. You wanted a visible, established move. The pullback to wholesale levels is so far away, it would not be feasible.

So there is the problem: You cant use this unless your entire strategy is based off of buying weakness that you can correlate shows some sort of professional accumulation.

When you can duplicate prof $ trading patterns, you are miles ahead. This is not easy, because it isn't.
Before, I thought that averaging in might be a good idea, but then I have done my research on this issue and found out that single entry approach gives better result than either scaling in (add position to winning trades) or averaging down. It doesn't mean that if you averaging down, you will be loss (having Profit Factor < 1). No, only your PF will be lower than PF with single entry approach. You still can have a winning trading system using averaging down entry but if you change it to single entry trading system, you will get better result.

For averaging down, as stated by Faure in previous post, you will have your losing trades at full lot size while on profit trades, you might have smallest lot size. Remember, best trends do not retrace, they will go straight to their destination price. At this kind of trades, averaging down traders will have minimum lot size on his trades while on all of his loser trades, they have maximum lot size. Yes 2nd and 3rd entry will have better RRR if they win but they will have much lower win rate than 1st entry.

I think the only reason why traders need to averaging down or scaling in is if they trade so much money that make they can't enter market in single price. If you don't trade that big, better use single entry method, simpler and better result.
In practice, trading is not black and white. Averaging down/averaging in are particulars, not universals. Both may work, both may not work, depending on the essence of the trading method in which they are being used.

My 2 pips,
vox
"To hold, you must first open your hand. Let go." - Lao Tzu
Quoting vox dei
In practice, trading is not black and white. Averaging down/averaging in are particulars, not universals. Both may work, both may not work, depending on the essence of the trading method in which they are being used. My 2 pips, vox
Good perspective Vox ! Too many people can only think in absolutes and in doing so they miss the bigger picture. As seen in forums like "Does hedging work" or "Trading without a stop loss" brings out the proponents and opponents who argue for 5-20 pages and then everyone retires back to their desk and meanwhile the market continues onward.
Quoting superdezign
Does anyone find any validity in the statement below? Doesnt it go against one of the biggest rules of trading: "Dont add to losing positions"... From Kathy and Boris's new book: "7. Averaging Down Is for Losers, but Averaging in Can Be the Difference Between Success and Failure Most traders will tell you that averaging down into a trade is a mug’s game. However averaging in is a strategy employed by a number of our interview subjects to a great success. What’s the difference? Intent. Traders who average into the positions expect to be initially...
You have to determine where the trade no longer becomes valid before you enter therefore remain 100% objective and emotionless
All posts are my personal opinion
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