Averaging In

I posted this on another thread, http://epchan.blogspot.com/2010/01/d...g-in-work.html. I thought it was worth posting again as I think the result is fairly important, I know I have said on this forum that I was of the opinion that averaging in could have a positive effect on expectancy, but this argument makes a fairly convincing case that I was wrong Worth a read anyway...

Mathematically there's no substitute for entering your full position at point "a" and exiting at point "b". But averaging in is more about controlling risk as points "a" & "b" are not certain.

regards,

Averaging in works best when you play the divergences since you know the price will pull back but can't pinpoint exactly WHEN. That's why it's best combined with other indi like Fib, S&R,etc...

Classic Forex Factory response, did you even read the article?
I give up.

With unlimited amount you can do it.

After every big drop you have to double the position.

It can be very profitable.

Yes, it's true that if you know when price will hit bottom and where it will peak, nothing can compare to the performance of picking tops and bottoms.

But in the real world, you don't know if $2 is the bottom. You don't know if $1 is the bottom. And you don't know if price will ever go back to $3. Price could drop to $0.50, then top out at $1.75 when the company declares bankruptcy and subsequently your position is $0.

So averaging in has nothing to do with increasing profit, and everything to do with managing risk. It's like I pointed out on the Leverage thread here at FF - at one point I was leveraged at 50:1 on EURUSD shorts. I was also riding a huge short wave that I had averaged in to and closed with a 60% profit.

I would have been an idiot to take a 50:1 position at any single point in that drop (I know this because I tried to re-enter that short position several times and lost a bit of that 60% profit as a result). However, averaging in let me build a very large, very pip positive position.