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why is everyone so afraid to average down?

  • #21
  • May 20, 2010 5:53am May 20, 2010 5:53am
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.
Not entirely true -

Maybe on a single trade basis and if the trader is using discretion on each single trade.

It very much depends on the phenomenon a trader is trying to exploit. My partner an I have carried out hundreds of statistical tests over quite a huge sample of trade setups. One of them was a break-out strategy that had a 20 pip stop and a 60 pip target on each trade.

We found that the model hardly broke even over 100s of trades - then we did an experiment in which we swapped the values (20 pip target and 60 pip stop for the same setup).

The results were quite astounding, because over the same amount of trades the model proved to be highly profitable. The moral of the story for us was that you cannot constrict price movement too much - because the amount of times (even with a positive RR of 3:1) stops were hit before the target was reached (negative win-loss ratio) turned the model into a loser.

As I mentioned in a different thread: a fine balance is needed in the application of risk (or stops).

regards
daytrading
Enter Signature
  • #22
  • Edited 5:56am May 20, 2010 5:54am | Edited 5:56am
Quoting thelws
Averaging down is a bad idea to begin with.
I disagree but I understand your position due to the losses you describe.

Quoting TGpop
But why everyone is so afraid to admit they aren't perfect on entry/exit is beyond me.
I'm not afraid. I'm hopeless.

Quoting thelws
A better strategy would be to cut loss and enter a new trade.
The EA trading screen shown here aims for a $10 profit over 1 trade or any set of short or long trades. It also hedges regularly - another no no for the "enlightened." It does a few other things too. Including closing the losing trades. And it's done okay for years.

Averaging down? For me, yes, it works.
Do not focus on making money; focus on protecting what you have.
  • #23
  • May 20, 2010 5:58am May 20, 2010 5:58am
Quoting Noloqy
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.
N,

2% by myself is only used for illustrative purpose here. Further to this, it should be distinguished between trade and position risk (which is not the same).

Trade risk should be only a fraction of position risk.

regards
daytrading
Enter Signature
  • #24
  • May 20, 2010 6:01am May 20, 2010 6:01am
it can be done profitably, but requires skill.
  • #25
  • May 20, 2010 6:05am May 20, 2010 6:05am
lol

what a question!! specially in swing trading!!

man, you've to test it yourself to see why cuz you wont take any word from posts here

and if you don't like testing like the most here, then experience will tell but it will be painful
  • #26
  • May 20, 2010 6:29am May 20, 2010 6:29am
Quoting mfoste1
bc i think tudor jones said it best....."Losers average losers"...
thats what i do as well, i use a multiple of ATR as a hard stop for all the positons, and then spread my three orders ...say every 100 pips further, i will cancel them all once the hard stop is breached. my RRR is often very high, im swing trading and using daily/weekly timeframes.

example is the USDJPY, i waited for the trendline break and wanted to buy the pullback , so i set a hard stop, averaged down and the trade worked.
  • #27
  • May 20, 2010 6:32am May 20, 2010 6:32am
Quoting daytrading
The moral of the story for us was that you cannot constrict price movement too much
I agree with this. I didn't mean to suggest that blindly tightening entries will produce superior results, but that it can be achieved with skillful precision.
  • #28
  • May 20, 2010 6:39am May 20, 2010 6:39am
Quoting thelws
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,...
i'm pretty sure spot forex options exist;if not trade currency futures and use options on them.
the pip count doesn't matter: by my analysis , BEFORE the trade occurs i set a stop loss, beyonf which i deem myself wrong, trades always go through dradown and people get too scared because they went all in from the start; averaging down until you see yourself wrong is a better way to reduce drawdowns. That martighale or whatever it's called, i know a trader who has done very well doubling down in forex and stocks, as in set a maximum loss, split up orders and double down UNTIL YOU SEE YOURSELF WRONG. your problem was that you went beyond your original risk, and didn't accept that your were wrong.

Averagin down is a way of accepting that you cannot pick exactly where the markets shoots off, you are not an expert in entries...
  • #29
  • May 20, 2010 7:38am May 20, 2010 7:38am
I think it's funny to see how fast your question was answered by the anti-Martingale paranoid crowd. You see, when people first start trading, one of the first lessons they usually learn is that the Martingale doesn't work, and of course, that's a valuable lesson to learn. The problem is that most of those people still don't really know what a Martingale is. They ignorantly believe that any time you are adding anything to a negative position you are deploying a Martingale strategy - but nothing could be farther from the truth.

It's sad because in this regard, the Martingale method harms traders in two ways. First it hurts them because some people are dumb enough to try and follow it to its logical conclusion. But it also hurts traders because once they've learned the nasty lessons of the Martingale, they then use that as a lazy rule-of-thumb to never add to a losing position.

If you're not sure how to distinguish between Martingale and averaging-down approaches, here are a couple guidelines:

 

  1. Why did you get into the trade in the first place? There was something that triggered you to make this trade (indicators, fundamentals, news, planetary alignments, whatever). If those conditions are still telling you to make the same trade, then you MAY want to consider adding something to the losing position. If those conditions have reversed themselves, and you still want to add to the losing position, then you might be falling down the Martingale hole.

  2. Why are you considering adding to the losing position? If the only reason that you want to add to the position is so that you can get "back to even" as fast as possible, then you're falling down the Martingale hole.

  3. Assuming that you're not just trying to get "back to even", then what triggers are you using to determine when/if you add to the losing position? Before you ever open the first trade, you should already know what conditions might cause you to add to the losing position. If you don't know what those conditions are, then just hold tight or close the position and take the loss.

  4. If you are going to add to the losing position, how much are you going to add, relative to the initial lot size? If you're adding progressively-larger lot-sizes to the losing trade, you're falling down the Martingale hole.

  5. At what point will you throw in the towel and close it out as a losing trade? You need to have this clearly defined long before you ever consider averaging down. If your only exit strategy is "when the position gets back to even", then you're falling down the Martingale hole.


If you're avoiding the pitfalls listed above, then averaging-down can be a key tool in your profitability arsenal. Don't let the anti-Martingale crowd spook you away from the potentially wise option of averaging down. Just understand the difference between the two.

  • #30
  • May 20, 2010 8:11am May 20, 2010 8:11am
lets assume something.

Based on my understanding of your principles. You all have a predetermined stop. Example we will say 3% of the total account. That means if you were to close out all open positions due to stop out, you lose a total 3 % of your account considering all your positions you used to average down.

This also means that when you start out, you are using less than 3%. In fact, you would probably be starting out with much less than 1%. If you stay true to the term average down - which means you purchase a larger lot size with the same amount of money, you will gradually have a larger lot size as you get closer and closer to your stop loss.

So this also means that when you profit right from the start, you profit less. Are you going to add on positions if price moves swiftly in your favour? You just mentioned that you cannot simply add on positions in averaging down. This also means you cannot simply add on positions when you are winning.

And... again... average down is a term used for stocks. When you average down, you are buying more stocks for the same price because it is now cheaper. In spot forex, you buy a larger lot size with the same amount of money because you are squeezing your stop loss margin. This in essence is similar to martingale.

If you keep you size constant everytime you add on to the loser, you are not really "averaging down" You are in essence, adding to a losing position. It is not even considered martingale.
  • #31
  • Edited 4:07pm May 20, 2010 8:28am | Edited 4:07pm
I read this in an article here posted by Editor, long ago (an excerpt from a book).

Take a 2% initial position.
let's say it is 20,000 units.

let's say you are an intra-day trader, trying to pick a long spot.

as the initial position moves against you, you take off units.

(example)
long 20,000 units at 1.5000

if it moves against you...

sell 5,000u at 14990
sell 5,000u at 14980
sell 5,000u at 14970
finally exit last 5,000u at 14960.

As the trade moves against you, you are cutting it. If it goes your way initially, you have the max position on.

Your average loss is much better than just losing 40 pips on 20,000 if it doesn't go your way.
Most importantly, you are taking your losses, and still have a chance even into the 4th increment to make money overall if it turns in your favor (depending on profit target).

This seemed to make so much more sense to me than averaging down.
  • #32
  • May 20, 2010 8:49am May 20, 2010 8:49am
for those who doubt the validity of averaging into a position...

read it and weep
Attached File(s)
File Type: pdf scaleoutstrategy.pdf   469 KB | 1,259 downloads
  • #33
  • May 20, 2010 8:54am May 20, 2010 8:54am
Quoting TGpop
thats what i do as well, i use a multiple of ATR as a hard stop for all the positons, and then spread my three orders ...say every 100 pips further, i will cancel them all once the hard stop is breached. my RRR is often very high, im swing trading and using daily/weekly timeframes.

example is the USDJPY, i waited for the trendline break and wanted to buy the pullback , so i set a hard stop, averaged down and the trade worked.
i think you might have mistook my post......I dont spread orders over hundreds of pips, i spread them over 20 or 30 pips....if you need to spread orders over 200 pips, youve obviously done something wrong. I use a 1 stop for the net pos. of the lots im trading, generally 80-100 pips( definetly no more than 100). If you need more than that much room to trade, youre either trading micro lots and or dont care, or youre asking for a margin call....
  • #34
  • May 20, 2010 8:57am May 20, 2010 8:57am
I remember hearing somewhere and it was from a well known trader during a video interview. His comments were along the lines of "only losers average losers'.

If you are wrong, then you need to admit and move on. You could very well be right 90% of the time by using the methodology just as you could be right by never employing a SL and letting positions run 100's of pips against you and take 20 pips profit when it arrives back in the green. The end result is usually an unstable market that is anything but rational throwing you a splendid curve ball that wipes you out.

Learn to accept losses as part of the process and do your best to ensure that your winners are larger. The other thing is for those who love to get rich. This market will chew you up, spit you out and the chew you up some more just for laughs. Very few people make big money 'long term' through avoiding losses and taking large risks, which dont go hand in hand from a mathmatical POV.

Razor
  • #35
  • May 20, 2010 9:06am May 20, 2010 9:06am
Quoting Razor_trader
I remember hearing somewhere and it was from a well known trader during a video interview. His comments were along the lines of "only losers average losers'.

If you are wrong, then you need to admit and move on. You could very well be right 90% of the time by using the methodology just as you could be right by never employing a SL and letting positions run 100's of pips against you and take 20 pips profit when it arrives back in the green. The end result is usually an unstable market that is anything but rational throwing you a splendid curve...
And just to clarify before I get misunderstood. There is a difference between spreading your orders and not understanding you are wrong. Spreading your orders can be effective with the use of indicators, S/Rs etc in that you understand the market doesnt always hit 'A' point and then move away so by spreading the orders across a field you are just aiming to get a least a portion of the orders picked up. Your SL is still worked out as a calculation of risk divided by the number of orders and there placements.

Averaging lossers is when the market is clearly not in your direction but instead of taking the loss you merely add to the position to bring the average price down thereby making the distance between BE and the market closer. This usually doesnt following any risk guidelines and in most cases the end results are disasterous.

Hope that clears things up if they were misunderstood

Razor
  • #36
  • May 20, 2010 9:42am May 20, 2010 9:42am
sigh, same comments, probably not really reading my posts.

'why add to a position if it's losing? accept the loss'
because entries are never perfect, if the trades starts to lose off the bat, my reasons for the trade are not necessarily 'wrong' now are they? like ive said loads of times, i pick a range and divide the orders up, and i have a point after which i consider myself wrong, yes you are right it probably does work better on stocks

another thing, how will this 'wipe me out' whenever the risk is clearly defined?

i add to winners in the same way... say im long 1/3, buy 2/3 100 pips up, buy 3/3 another 100 pips up.
  • #37
  • May 20, 2010 11:13am May 20, 2010 11:13am
Stop your sighing TGPop, Razor clarified it in the second post! It's easiest to define scaling in as what you're doing (where you spread your set risk over several orders), and averaging down as what willful gamblers do (where they double their initial risk on losing trades). One is a road to ruin, and the other is ... well, just a different way of doing things.

As with any of these, there's nothing clear cut about it at all. If say you can pick reversals with a higher than 50% accuracy, then scaling in will hurt your profits, period. In fact, rather than scaling in, the reverse is true - a breakout at your stop will increase profits, because you're picking levels that are so key, a break of them will signify a change of market sentiment.
If however you often can identify emerging trends but often find your timing off and getting stopped out, then I'm sure scaling in will suit you and your bottom line.
As for averaging up - it only makes sense if an individual trade you add-on is profitable by itself. If your strategy is good to start with, averaging up will amplify profits. If it's rubbish, it will similarly amplify losses. Ain't no free rides in FX.
  • #38
  • May 20, 2010 11:16am May 20, 2010 11:16am
Quoting Razor_trader
And just to clarify before I get misunderstood. There is a difference between spreading your orders and not understanding you are wrong.
Quoting TGpop
because entries are never perfect, if the trades starts to lose off the bat, my reasons for the trade are not necessarily 'wrong' now are they?
This was the main point I was trying to make in my earlier post. There was a reason you made the trade in the first place. Sometimes, that reason evaporates and you must have the wisdom to recognize that it was simply a bad trade. But sometimes, all of your initial triggers are still screaming that the market should go in a given direction. If that is the case, then there's nothing wrong with adding some to the losing position. The risk can still be appropriately managed (just as the initial trade was).

That being said, if your underlying trading process is flawed, then you're going to lose money over time. You're going to lose money if you DO "average down" and you're going to lose money if you DON'T "average down". Averaging down doesn't make a losing strategy into a winning one. Money management alone never turns a losing strategy into a winning one.
  • #39
  • May 20, 2010 11:36am May 20, 2010 11:36am
Quoting triphop
As with any of these, there's nothing clear cut about it at all. If say you can pick reversals with a higher than 50% accuracy, then scaling in will hurt your profits, period. In fact, rather than scaling in, the reverse is true - a breakout at your stop will increase profits, because you're picking levels that are so key, a break of them will signify a change of market sentiment.
If however you often can identify emerging trends but often find your timing off and getting stopped out, then I'm sure scaling in will suit you and your bottom line.
As...
If we can consistently pick reversals more often than not, I'd still suggest scaling in anyway. Jumping in immediately does maximise profit, but it also maximises the loss. Scaling in minimises loss if the trade doesn't work at, at the cost of slightly less potential profit.
  • #40
  • May 20, 2010 11:45am May 20, 2010 11:45am
It's turning into an interesting thread and I know why I instinctively scatter market orders around s/r levels and then delete those I don't like:

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Gone to a better place
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