why is everyone so afraid to average down? | Forex Factory

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why is everyone so afraid to average down?

  • #1
  • First Post: May 20, 2010 2:37am May 20, 2010 2:37am
I often wonder why people put so much emphasis on entry ' the market's going to bounce off this pip, i just know !'

What's wrong with establishing an amount per pip, then adding to position, winner or loser till it gets there.

Take now i shorted the eurusd, at 1/3 of my total position size, if it rises some more (X pips) i will add another 1/3 etc.

same with winners, i will ad to them on the way down...

average averaging down is silly, as in , buying at support, it cracks and you add some more: has to be planned.

But why everyone is so afraid to admit they aren't perfect on entry/exit is beyond me

ps this is mostly for swing trading
  • #2
  • May 20, 2010 2:41am May 20, 2010 2:41am
I average down, but sometimes you have to pay the fiddler. Painful.
  • #3
  • May 20, 2010 2:43am May 20, 2010 2:43am
Quoting tdion
I average down, but sometimes you have to pay the fiddler. Painful.
of course, if i think the market will react to a level well, i'm going to put more risk into it lol, it's just that when say EURUSD is on the rise now, but you think it could collapse...you can average down every 150-200 pips or so
  • #4
  • May 20, 2010 3:00am May 20, 2010 3:00am
Quoting TGpop
I often wonder why people put so much emphasis on entry ' the market's going to bounce off this pip, i just know !'

What's wrong with establishing an amount per pip, then adding to position, winner or loser till it gets there.

Take now i shorted the eurusd, at 1/3 of my total position size, if it rises some more (X pips) i will add another 1/3 etc.

same with winners, i will ad to them on the way down...

average averaging down is silly, as in , buying at support, it cracks and you add some more: has to be planned.

But why everyone is so afraid...
I agree with you but I will only average down with very small position sizes, so that when I am wrong (notice I say when, and not if, because, believe it or not I am sometimes wrong) it doesn't hurt too much. It's satisfying to get in at a top or bottom but much safer to trade off price action at the level we anticipated and miss a few pips, set a proper sl and tp and leave the trade alone.
Gone to a better place
  • #5
  • May 20, 2010 3:12am May 20, 2010 3:12am
Averaging down is a bad idea to begin with. Let me tell you a story of myself once upon a time.

I used the martingale strategy at one point in time. Sure I average down. It works mighty fine for a while.

But then 1 day, the market started to tank and I was long. I averaged down. In fact I average down around S/R (some of which were about 200 pips aparts). I thought it would start to reverse in my favour at some point... but guess what? It didn't reverse after 500 pips. With 2 average downs and a huge loss I had a floating loss that if closed, would take out 95% of my account.

In the end I did close out my positions and with it my account. I remember this was during the subprime crisis and I was long EUR/USD. Prices continued to move downwards for almost 1000 pips without pause.

The market will often reward you for doing the wrong things. This is one of them that was wrong. Unlike stocks, there is no guarantee at the end of the day that a company will pay you dividend. You can't average down and hold on to your position indefinately like stocks. There is no benefit in averaging down in spot forex.
  • #6
  • May 20, 2010 3:41am May 20, 2010 3:41am
I started a thread about this a little while ago... I totally agree with you.

For example if put your first position in at with 1% and SL is 100 pips (using correct position sizing ofcourse) and now if goes 40 pips against you could put in another position of 1% and a SL of now 60 pips on this new position and then it goes another 30 pips against you so you put another position with 1% and now this position has a SL 30 pips.

All your positions:

1st SL 100 - TP 100 Position 1% - R:R = 1:1 = 1%
2nd SL 60 - TP 140 Position 1% - R:R = 1:2.33 = 2.33%
3rd SL 30 - TP 170 Position 1% - R:R = 1:5.66 = 5.66%

3% risk win = 10%

However you could tweak the above to suit your needs and come out with a R:R or 1:1 or 1:2 or 1:3

or one position of SL 100 - TP 100 Position 3%

So you are in a better position for this to come out a winner than the original position and you have a better R:R.

Good luck.
  • #7
  • May 20, 2010 3:46am May 20, 2010 3:46am
Quoting thelws
Averaging down is a bad idea to begin with. Let me tell you a story of myself once upon a time.

I used the martingale strategy at one point in time. Sure I average down. It works mighty fine for a while.

But then 1 day, the market started to tank and I was long. I averaged down. In fact I average down around S/R (some of which were about 200 pips aparts). I thought it would start to reverse in my favour at some point... but guess what? It didn't reverse after 500 pips. With 2 average downs and a huge loss I had a floating loss that if closed,...
I agree with thelws. A fatal error in the wrong direction can wipeout an entire account eg. trading GBPJPY or EURJPY
  • #8
  • May 20, 2010 3:56am May 20, 2010 3:56am
Indeed it can be done - but is it worth to stick with a bad position?

Main thing is to know at the entry of the first unit of a full position, at what % loss of the overall capital to pull the plug.

In other words, if you are intending to add to a negative position and you have calculated that even through adding another 3 units in 100 pip steps (and the price goes another 50 pips or so beyond the last unit), i.e. the whole position is now over 300 pips against you, you are not exceeding your % risk (e.g. 2%) of the combined position, then that is ok.

The problem is that most people are already overexposed when they add the first time to a position (let alone at the levels they add) - which can ultimately blow them out of the water.

If your strategy relies on 'floating' entry levels - for example because you have a longer term target and you are prepared to build a position consisting of 3,4, or more smaller units, you still have to respect when your original view becomes less likely to materialize - see 'thelws' post - and either lighten the position by taking units off with a loss or in the worst case, cut the whole position @ (-X%) in a disciplined way.

regards
daytrading
Enter Signature
  • #9
  • May 20, 2010 4:19am May 20, 2010 4:19am
Quoting thelws
Averaging down is a bad idea to begin with. Let me tell you a story of myself once upon a time.

I used the martingale strategy at one point in time. Sure I average down. It works mighty fine for a while.

But then 1 day, the market started to tank and I was long. I averaged down. In fact I average down around S/R (some of which were about 200 pips aparts). I thought it would start to reverse in my favour at some point... but guess what? It didn't reverse after 500 pips. With 2 average downs and a huge loss I had a floating loss that if closed,...
this is why i said, that averaging down as you have, is dumb.
do it in a calculated manner- don't keep averaging down forever, i average down 3 times, then that's it, if price keeps heading up and i've shorted (i set a stop loss obviously) i exit when it passes the stop loss.
  • #10
  • May 20, 2010 4:27am May 20, 2010 4:27am
course though, im swing/position trading to be honest i could just buy a put option when going long instead of doing this (which i plan to do instead, later) and add to winners on dips

whether using options or averaging down the good thing is you don't try and hit that 'pip' and try be awesome and know where it will reverse from, options give you time to stick to your original plan
  • #11
  • May 20, 2010 4:29am May 20, 2010 4:29am
Quoting TGpop
this is why i said, that averaging down as you have, is dumb.
do it in a calculated manner- don't keep averaging down forever, i average down 3 times, then that's it, if price keeps heading up and i've shorted (i set a stop loss obviously) i exit when it passes the stop loss.
In the first place, when you are -170 pips, what makes you think price will miraculously bounce back to your original take profit levels? At that point in time, what is more likely to happen is your SL getting hit. Just because it is near a support resistance doesn't mean it is safer.

I used to apply martingale, which is adding even bigger positions when you average down. That way, a smaller retrace is needed to break even. If you don't do that, you will require the price to retrace a long way for you to break even.

But as I have said, it is a flawed startegy to begin with. When you are - 170 pips it is highly unlikely that prices will retrace all the way up. In fact, you are gonna be really lucky if price retrace halfway for you to break even.

A better strategy would be to cut loss and enter a new trade.

Also, spot forex does not have options. Like I said, there is no benefit averaging down in spot forex. It is slightly different compared to futures or stocks.
  • #12
  • May 20, 2010 4:48am May 20, 2010 4:48am
Averaging down done just for the sake of doing it will surely kill you. Period.

If you want to go down that road there are three extremely important ingredients that you need: 1)adequate capitalization; 2)the ability to read market shape; 3)the maths behind the actual averaging
  • #13
  • May 20, 2010 5:16am May 20, 2010 5:16am
Quoting TGpop
I often wonder why people put so much emphasis on entry ' the market's going to bounce off this pip, i just know !'

What's wrong with establishing an amount per pip, then adding to position, winner or loser till it gets there.

Take now i shorted the eurusd, at 1/3 of my total position size, if it rises some more (X pips) i will add another 1/3 etc.

same with winners, i will ad to them on the way down...

average averaging down is silly, as in , buying at support, it cracks and you add some more: has to be planned.

But why everyone...

bc i think tudor jones said it best....."Losers average losers" and this is so true

unless you are building a position with a great RRR, averaging will not work for you. I can guarantee you that 99% of the time when you average losing trades you will only find yourself deeper in the hole, and more afraid to lose money you cant.

The only time I ever "average trades" is when im building positions, for ex. i may spread 1 lot total over 20-30 pips range and put a stop on the net position of those mini lots for 80-100 pips.......but in these trades my targets are well over 100 pips. I dont make trades based on any TF less than 4h. Ive found this is a very solid strategy with a high win % if you know how to read the market....
  • #14
  • May 20, 2010 5:22am May 20, 2010 5:22am
Quoting Setebos
Averaging down done just for the sake of doing it will surely kill you. Period.

If you want to go down that road there are three extremely important ingredients that you need: 1)adequate capitalization; 2)the ability to read market shape; 3)the maths behind the actual averaging
Assuming you have adequate cap:

2)If you were good in the first place, you wond't need to average down.
3)Can you enlighten me what that math is like?

I'm rather skeptical. Its not like you gain more stocks by averaging down in spot forex....
  • #15
  • May 20, 2010 5:36am May 20, 2010 5:36am
Yes I totally agree with you, the key is position sizing and trade management - what a lot people do not understand.

I cannot pick tops and bottoms in a trade... when my signal is lined up... I enter and most of the time I end up DD, so I will average my trade in with a max 3% and I can exit at 1:1, or 1:2 or 1:3, I just manage my trade.

I mean how many time's do people enter a trade and do not end up in DD?

Quoting daytrading
Indeed it can be done - but is it worth to stick with a bad position?

Main thing is to know at the entry of the first unit of a full position, at what % loss of the overall capital to pull the plug.

In other words, if you are intending to add to a negative position and you have calculated that even through adding another 3 units in 100 pip steps (and the price goes another 50 pips or so beyond the last unit), i.e. the whole position is now over 300 pips against you, you are not exceeding your % risk (e.g. 2%) of the combined position, then that...
  • #16
  • May 20, 2010 5:36am May 20, 2010 5:36am
It depends on the definition of a losing trade.

Too many traders are calculating their maximum loss in pips based on a certain value per pip which ultimately represents a certain percentage of capital.

If you know the amount in dollars and % you are willing to lose (risk) on each trade, and as long as all your units in play (whether averaged down or not) do not exceed that percentage loss you are willing to take, then by definition, your trade is not a 'loser' (even if it periodically shows a negative value because you averaged into the position).

What the market tells people who use 'averaging' is irrelevant here since there are too many ways of approaching a trade - and where one person takes 20 pips on average from a winning trade, another might take 2000 pips - for the later a few hundred pips fluctuation during the entry phase does not matter much.

A real losing trade begins when people disrespect the risk they have initially set - regardless of how many units they have in a trade and whether they have averaged or not: 2% risk on a single trade is 2% risk on a single trade (for comparison purpose)...going beyond the 2% once you are in a trade that is moving against you and adding to that will turn you and the trade into a 'loser'.

regards
daytrading
Enter Signature
  • #17
  • May 20, 2010 5:38am May 20, 2010 5:38am
Quoting thelws
Assuming you have adequate cap:

2)If you were good in the first place, you wond't need to average down.
3)Can you enlighten me what that math is like?

I'm rather skeptical. Its not like you gain more stocks by averaging down in spot forex....
As good as you may be in shape reading it is usually timing that slips away so this is actually where the averaging down comes in place. And once again if you are good in reading the market you will know where you should place your averaging order.
Regarding the maths - there are a number of different mathematical progressions that can be used for averaging. The key being again market conditions (range, volatility, etc). People are so scared of the dark martingale myth that they prefer to ignore the fact that there's other fish in the water
We, being small traders, can only manipulate one side of the trading process - the one on our side of the monitor. So this is just another tool, not a rule

Btw I like your signature
  • #18
  • May 20, 2010 5:41am May 20, 2010 5:41am
Quoting TGpop
I often wonder why people put so much emphasis on entry ' the market's going to bounce off this pip, i just know !'
Tighter entries lessen risk while magnifying profit. This is just as true for a swing trader as for a intraday trader. I'm a position trader, but I still make tight entries when I can.
  • #19
  • May 20, 2010 5:44am May 20, 2010 5:44am


Quoting daytrading
It depends on the definition of a losing trade.

Too many traders are calculating their maximum loss in pips based on a certain value per pip which ultimately represents a certain percentage of capital.

If you know the amount in dollars and % you are willing to lose (risk) on each trade, and as long as all your units in play (whether averaged down or not) do not exceed that percentage loss you are willing to take, then by definition, your trade is not a 'loser' (even if it periodically shows a negative value because you averaged into the position).

What...
  • #20
  • May 20, 2010 5:47am May 20, 2010 5:47am
Quoting Mr J
Tighter entries lessen risk while magnifying profit. This is just as true for a swing trader as for a intraday trader. I'm a position trader, but I still make tight entries when I can.
Will it also lessen risk if you adjust your position size so that you always risk the same fraction of your account? I believe this is what most traders do around here, as the '2% rule' is one of the most frequently stated concepts on this forum.
The nail that sticks out gets hammered back in
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