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why is everyone so afraid to average down?

  • #61
  • May 21, 2010 4:53am May 21, 2010 4:53am
Quoting TGpop
i agree , give trades room, wide stops and smaller lot sizes.
Well that is arguable also. Just taking trades with wider stops and small lots sizes does not solve anything, although you may argue that your win rate is higher. It comes down to the way your approach your trading, risk appetite, entrys/exits etc. Scaling may work for some others perhaps not but just widening your Stops and having small position sizes is not an answer that will work long run. The biggest trouble being overcoming the distance to attain growth. However if your trading is based around daily signals and that is where you take trades (I do alot off daily's) then yes you will naturally have wider stops.
  • #62
  • May 21, 2010 5:58am May 21, 2010 5:58am
Quoting Razor_trader
Well that is arguable also. Just taking trades with wider stops and small lots sizes does not solve anything, although you may argue that your win rate is higher. It comes down to the way your approach your trading, risk appetite, entrys/exits etc. Scaling may work for some others perhaps not but just widening your Stops and having small position sizes is not an answer that will work long run. The biggest trouble being overcoming the distance to attain growth. However if your trading is based around daily signals and that is where you take trades...
I think that it comes down to not wanting to or being afraid to take that inevitable loss. Scaling down will make you a hero when it works out, but when it doesn't you're just a sinking goat.

Scaling up however is a method that works perfectly fine. If you're in a trending market and it's moving your way, there is no reason not to. I personally do this all the time while moving my stops up or down along with the positions until it's risk-free.
I dream, therefore I become.
  • #63
  • May 21, 2010 6:31am May 21, 2010 6:31am
For my Y20, I scale in over 2-500 pips on trend pullbacks. The farther it goes against me, the happier I am because it means when the trend continues I make more loot.

Averaging isn't for everyone or every strategy, but profitable systems can definitly be built around them.
  • #64
  • May 21, 2010 7:19am May 21, 2010 7:19am
If averaging down is done within your conservative money management strategy... not problem. If you limit your total exposure to less than 5% of your account, it can be a handy tool. Most folks do not do this. They start out with a 5% risk trade, and instead of letting their stop hit, they double down. Then, when it continues against them, they double down again. This is insane. I may work for a week or 2 or 3, but eventually it will end with account destruction.

Regards,
  • #65
  • May 21, 2010 7:29am May 21, 2010 7:29am
Have to agree with Petra I rarely do avg but there are instances where an entry is made in my trading where I have multiple areas to enter but if I do not plan the muliple entries before hand I do not take them. Not being able to accept the loss is the reason many lose on averaging in my opinion.
  • #66
  • May 21, 2010 7:52am May 21, 2010 7:52am
Quoting Darkstar
For my Y20, I scale in over 2-500 pips on trend pullbacks. The farther it goes against me, the happier I am because it means when the trend continues I make more loot.

Averaging isn't for everyone or every strategy, but profitable systems can definitly be built around them.
Quoting FX-Petra
If averaging down is done within your conservative money management strategy... not problem. If you limit your total exposure to less than 5% of your account, it can be a handy tool. Most folks do not do this. They start out with a 5% risk trade, and instead of letting their stop hit, they double down. Then, when it continues against them, they double down again. This is insane. I may work for a week or 2 or 3, but eventually it will end with account destruction.
Both perfectly logical as there is a measure implemented that defines when you are wrong. If you have a set risk of equity and once it is exceeded you close out then that is fine, it is part of your management. As far as the trend goes it is also a matter of knowing when a trend is done and how many orders are place and at what intervals that will govern long term success. I went to a seminar with a gent who made his million in the same manner however he lost it in the space of just over a week because his orders were too many and the drop in price was to great. For him he did exactly the same thing that made him his millions so he didnt expect it to go wrong so quickly. That can be the failure point, just as with martigales that work in the short run.

All to there own though and a good number of sound strategies fail in the long run for there own reasons. Knowing when to cut the weight of loosing trades can be difficult to swallow but not as difficult as having to start again with a shattered mental approach that is usually created when you've traded so well only to see it blow up in a short space of time.

Razor
  • #67
  • May 21, 2010 9:45am May 21, 2010 9:45am
It makes no sense to add to a losing trade. The end result of doing so is just that you will have accepted a greater loss, greater drawdown, and have less dry powder to apply to the right entry and successive entries. If you are position trading and you spread your entry out over 200 pips in the red or whatever, even if you have done so within a set limit on drawdown, then you are still sailing against a rising tide at best, risking shipwreck at worst. You will have to make up the loss on your loser anyway, so wouldn't it just be better to cut that loser short & reassess your entry? Maybe it works for you sometimes, but in every instance you would have been better off, made more profit with less dd overall, after having cut your loss short.

That's my mo, anyway, & I'm stickin to it.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #68
  • May 21, 2010 1:02pm May 21, 2010 1:02pm
Because that technique has a tendency to make money disappear.
  • #69
  • May 21, 2010 2:26pm May 21, 2010 2:26pm
Quoting mr.marketz
Because that technique has a tendency to make money disappear.
not if you plan your averages before , in a risk averse manner
  • #70
  • May 21, 2010 2:37pm May 21, 2010 2:37pm
Quote
Averaging isn't for everyone or every strategy, but profitable systems can definitly be built around them

I've rarely seen martingale-ish "profitable systems" that continually win.... as has been said before... one major market move against you and your account is TOAST!

SL is the way to go, in my opinion (I've blown an account by averaging)
  • #71
  • May 21, 2010 2:40pm May 21, 2010 2:40pm
Quote
I've rarely seen martingale-ish "profitable systems" that continually win.... as has been said before... one major market move against you and your account is TOAST!

SL is the way to go, in my opinion (I've blown an account by averaging)

Although it is theoretically possible to win EVERY TIME in a martingale account... assuming your account size is LIMITLESS.

For those of us with smaller accounts less than $1 Trillion, I'd stay away from this practice
  • #72
  • May 21, 2010 2:54pm May 21, 2010 2:54pm
Quoting The Fool
It makes no sense to add to a losing trade. The end result of doing so is just that you will have accepted a greater loss, greater drawdown, and have less dry powder to apply to the right entry and successive entries. If you are position trading and you spread your entry out over 200 pips in the red or whatever, even if you have done so within a set limit on drawdown, then you are still sailing against a rising tide at best, risking shipwreck at worst. You will have to make up the loss on your loser anyway, so wouldn't it just be better to cut that...
At what point is a trade a loser? It almost sounds like what you are saying is that if you put on a trade and it goes in drawdown it's a loser. If you risk 2% on a trade what does it mater if you scale in .5% at a time as it drawsdown? 2% is 2%. Maybe I'm reading your post wrong...
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #73
  • May 21, 2010 3:26pm May 21, 2010 3:26pm
Quoting forexdave
I've rarely seen martingale-ish "profitable systems" that continually win.... as has been said before... one major market move against you and your account is TOAST!

SL is the way to go, in my opinion (I've blown an account by averaging)
ignorance...sigh.

how is my account going to be toast when i use stop losses on my average downs?
  • #74
  • May 21, 2010 3:28pm May 21, 2010 3:28pm
Averaging down is a classic example of the Dunning-Kruger effect at play within the Forex market. It is not something that should be played with by the unskilled. Those that do employ it successfully have got to know what they are doing and yet everyone of them also has a story of how it went very bad for them at one time or two.

One has to have serious discipline for this strategy. It is probably the single most cause of margin calls and blown accounts - just an impression I've gathered reading the forum for years as I have no #'s to prove this.

The Dunning–Kruger effect is a cognitive bias in which "people reach erroneous conclusions and make unfortunate choices but their incompetence robs them of the metacognitive ability to realize it."[1] The unskilled therefore suffer from illusory superiority, rating their own ability as above average, much higher than in actuality; by contrast, the highly skilled underrate their abilities, suffering from illusory inferiority. This leads to a perverse result where less competent people will rate their own ability higher than more competent people. It also explains why actual competence may weaken self-confidence because competent individuals falsely assume that others have an equivalent understanding. "Thus, the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others."[1]
In trading, there is no bullshit. You either make money or you don't.
  • #75
  • May 21, 2010 3:31pm May 21, 2010 3:31pm
Actually grid trading works too, which is essentially averaging down except you double down (kind of like martinghale) so instead of .1 .1 .1 .1 it's .1 .2 .4 .8

say i want to go short eurusd right now and wanted to establish total net amount of $7 pip, as it rises just keep averaging down (1,2,4)- set a stop loss of the averages too, therefore your risk is limited, just as a hard entry hard stop method.
  • #76
  • May 21, 2010 3:34pm May 21, 2010 3:34pm
Quoting mrgreen
Averaging down is a classic example of the Dunning-Kruger effect at play within the Forex market. It is not something that should be played with by the unskilled....
i disagree: surely by averaging down in a calculated risk controlled manner you are accepting that you aren't amazing and perfect on entries?
  • #77
  • May 21, 2010 3:48pm May 21, 2010 3:48pm
Disagree with what? Do you understand this sentence?
"people reach erroneous conclusions and make unfortunate choices but their incompetence robs them of the metacognitive ability to realize it."


Quoting TGpop
i disagree: surely by averaging down in a calculated risk controlled manner you are accepting that you aren't amazing and perfect on entries?
In trading, there is no bullshit. You either make money or you don't.
  • #78
  • May 21, 2010 3:55pm May 21, 2010 3:55pm
Quoting mrgreen
The Dunning–Kruger effect is a cognitive bias in which "people reach erroneous conclusions and make unfortunate choices but their incompetence robs them of the metacognitive ability to realize it."[1] The unskilled therefore suffer from illusory superiority,...
Thanks for the reference, I was familiar with the concept, but didn't know it actually had a name...

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  • #79
  • May 21, 2010 4:04pm May 21, 2010 4:04pm
Quoting mrgreen
Averaging down is a classic example of the Dunning-Kruger effect at play within the Forex market. It is not something that should be played with by the unskilled. Those that do employ it successfully have got to know what they are doing and yet everyone of them also has a story of how it went very bad for them at one time or two.

One has to have serious discipline for this strategy. It is probably the single most cause of margin calls and blown accounts - just an impression I've gathered reading the forum for years as I have no #'s to prove this....
Extremely interesting... I love things like this.
Living the adventure in my head.
  • #80
  • May 21, 2010 4:18pm May 21, 2010 4:18pm
Quoting LasVahGoose
At what point is a trade a loser? It almost sounds like what you are saying is that if you put on a trade and it goes in drawdown it's a loser. If you risk 2% on a trade what does it mater if you scale in .5% at a time as it drawsdown? 2% is 2%. Maybe I'm reading your post wrong...
No, you're right, LVG - 2% (or whatever) is 2%, whether you scale in or not. I merely expose my bias, since I mostly scalp breakouts at such highly leveraged entries that, indeed, almost any move against me is a loser.
"If The Fool persists in his Folly he will become wise." - William Blake
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