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why is everyone so afraid to average down?

  • #101
  • May 23, 2010 3:25am May 23, 2010 3:25am
[quote=Intu;3746961]That was an interesting read, if thread followers have missed it, please check out Razzle's #32 post .pdf in this thread.

"In particular, the[font=Times New Roman]
double-down strategy, considered risky
by some practitioners, gave more than a
350% larger return over the two-tiered
strategy and more than a 150% larger
return over the basic three-tiered strategy"


You see I did read this and it doesn't stack up. First off, rather than compare it against any of their esoteric strategies, you compare it against a baseline of a simple all in entry against a static take profit. If you do that, it really doesn't and cannot add up, unless in the second position you're actually increasing your risk by considering it 'another' position. If you split the original risk across the first position, and a potential second, and your entries are good, you'll have a lower average profit compared to the baseline.

The mean reversion argument DS states above I can see. This... I just don't get it.
  • #102
  • May 23, 2010 5:00am May 23, 2010 5:00am
Quoting coronajazz
The trouble is how do you know whether a pullback is a pullback, or a complete decade long reversal.
When you know that you are wrong ,as you said, do you get out of that trade completely? And if you do, presumably, that loss will be pretty big, cause of the builded up position, are your winners big enough to wipe out that loss and bring you in profit on the long run?

I am not criticizing, just trying to learn something new.

Regards!

Coronajazz!
you have misunderstood, again. i set stop losses on the trades i average down with, they all have the same SL, a point which i deem myself wrong, decided before the trade begins....
  • #103
  • May 23, 2010 5:34am May 23, 2010 5:34am
http://chartsyfx.blogspot.com/2010/05/details.html

here's my blog, i will be trading using averaging down on demo. i am a noob.
  • #104
  • Edited 10:25am May 23, 2010 10:02am | Edited 10:25am
for Triphop...

I'm with you, still a bit skeptical. After examining the article again, I think
I've found the weakness. These results were determined from probability models, not actual trades. This particular article relies on a specific set of input parameters, listed on page 35.

At various points, the author states "again, model input parameters can be adjusted to reflect real world trading."

With the graph Strategy Results, "Here, using the inputs shown, we quantify the directed graphs to generate expected values for our various scale-out strategies".

So... these are the results of probability models, with specific settings, not an actual group of trades. This obviously totally disregards recency bias, support and resistance, etc. (which we might see in the real market).

Isn't it similar to the faulty logic of "as long as I set my TP to 3 and my SL to 1, and make random entries, I will definitely make money" ? (over-simplified example) These probability models have rigid settings and assume random market entry.

for TGpop,

You've created a great thread. If it works for your methods, then it works. None of us trade optimally, whatever that may be. We all have different risk levels, position sizing methods, entry selection, and ways to take profit.
  • #105
  • May 23, 2010 10:24pm May 23, 2010 10:24pm
Quoting Darkstar

As a side note, I never understood why people would add to their winners. Every time they do they increase the risk at progressively shittier pricing...

Unless the market is about to trip a whole bunch of stops
Private message me for a link to my order flow website.
  • #106
  • May 23, 2010 11:24pm May 23, 2010 11:24pm
I prefer use cut-switch rather than averaging... you turned into gambling zone if averaging down
  • #107
  • May 24, 2010 1:28am May 24, 2010 1:28am
Quoting TGpop
why is everyone so afraid to average down?
If you don't know who Nick Leeson is, never heard of Enron, Nortel, or the 1974 sugar trade, watch this.

The best 10 minutes you will spend getting the answer you need.

http://video.yahoo.com/watch/4881926/13011214

Averaging into a winning trade on pullbacks is a perfectly acceptable way to increase position size, never the inverse.
  • #108
  • May 24, 2010 2:13am May 24, 2010 2:13am
Quoting Fudomyo
If you don't know who Nick Leeson is, never heard of Enron, Nortel, or the 1974 sugar trade, watch this.

The best 10 minutes you will spend getting the answer you need.

http://video.yahoo.com/watch/4881926/13011214

Averaging into a winning trade on pullbacks is a perfectly acceptable way to increase position size, never the inverse.

I haven't read the whole thread so this may have been mentioned before......

Adding to a losing position (averaging) is fine, some traders call it scaling-in and there's absolutely nothing wrong with it. Just as long as you have a predefined risk then you can do pretty much anything you like. It's out-of-control losses which cause the problems, not planned and risk-managed trades.

For longer term trades, especially those based on fundamentals, it's a necessity as trying to pinpoint entries is nigh on impossible.
  • #109
  • May 24, 2010 2:56am May 24, 2010 2:56am
i agree with pitpmutt. i do the same. as long as you have a defined risk there is nothing wrong with averaging. i average both loosers and winners up and downs and have found out that with a a50 k account a 1/100 leverage and an initial .1 lot position it works perfectly fine. it may not be the most effective in terms on rr but it also saves you a lot of time cause you dont have to try to guess the exact turning point or end of retrace
Andreyou
  • #110
  • May 24, 2010 3:27am May 24, 2010 3:27am
Quoting thelws
Ok, I see a lot of discussion has happened since I last posted. Let me attempt to answer this with some logic and experience (or lack of it if you want to call it that way)

The main argument here that some of you who average down (or add on to losing positions) is that IF you have a predetermined stop you are safe. I understand this perfectly well. In fact, to most, it would seem that there is no problem at all.

My main dissatisfaction is this:
-When you have that kind of average down mindset, you are severely sabotaging your risk reward...
What I find extremely interesting in this discussion is that the notion of reward-to-risk seems to ignore all the 'unknown' possibilities inside (or in between) the risk and the so called target.

We all know our precise risk on each trade (or so we should).

Nobody on the other hand knows if any target will be hit at all, missed by X pips or overshoot it by X pips.

There seems to be some assumption though by some, that if any stop is not hit initially (or as described, the position goes 'in your favour'), it will hit your 1:1 target (at least).

So what happens when the trade is on? Even the best laid out plans based on all the back-testing in the world and all the probabilities in the world won't help to prevent making the wrong decisions from time to time.

Let's be honest here: how well dos anyone really know their chosen market?

I am asking this question because ultimately, your most decisions are based on our beliefs about what is going to happen next in any sequence of events and most try to logically eliminate one (market going up) or the other (market going down) possibility in order to decide to keep a trade or abandon it.

Now, unless you are a 100% mechanical trader who believes unquestionably in the self-calculated positive expectancy of a system (and hence does not really care about a few losing trades here and there, because over 1000's of trades the bottom line is positive), you will definitely be influenced in your assessment of the market once your in the trade.

Back to the question of how well a trader thinks he knows his chosen market.

Do you plan to average down before you enter?
Do you plan to scale into any given trade?
Is this your regular way of entering a trade?
Do you spontaneously add to a position if its in the red, believing the price will come back to your original entry and so deliver a profit despite your initial market expectation not being met?
Does you plan include an ultimate point of capitulation on any trade idea - i.e if that point is reached you get out?
Is your mind set based on single trade 'win all or lose all' view?
Do you also have a plan that you follow if neither point is reached in your expected time frame (stop or target)?
Does your strategy cater (or allow) for the possibility to INCREASE or DECREASE your overall position at specific times?

Or do you carry out any of the above impulsively based on what the market does at any given time?

The truth is, we all stand and fall according to our beliefs in this game. If our beliefs about the market are not in line with how the market acts, we lose money. Unfortunately, humans are not the greatest when it comes to adjusting ones own beliefs and admitting that something we thought should work, suddenly does not.

Averaging into trades (up or down) is only an entry strategy if carried out correctly.

Your ultimate belief about market direction should be in accordance with what the market tells a trader. Adding to a position that that is in profit when there are already clear signs of exhaustion is as wrong as it is to add to a negative position when there are clear signs that the original direction might not be resumed any time soon.

Taking risk in a calculated manner (whether by entering one huge trade with a massive pip value and a closer stop, or by spreading your entries over a number of price locations with a clearly defined %-stop for the total value of the position) is key.

Which ever way one might get into the market, if the market does not act according to what you have believed when you entered, consider the possibility to get out - that goes for both directions, even if you are in profit and the price just seems to stall before reaching your target.

regards
daytrading
Enter Signature
  • #111
  • May 24, 2010 4:39am May 24, 2010 4:39am
Quoting pipmutt
...Just as long as you have a predefined risk then you can do pretty much anything you like.
Of course you can do anything you like. Everyone trades differently.

Guessing when and if the market is going to turn around is just that. Maybe risking a few hundred dollars on a potentially bad trade isn't that big a deal for some people.

But trading large lot sizes or other people's money, doubling down on losses usually isn't an acceptable practice, for that matter neither is a large DD, so a lot depends on your circumstances.

That's all I really have to add here, it's ultimately up to people to individually choose what works best for them after weighing the risk reward.

Best of luck with your trades.
  • #112
  • Edited 7:07am May 24, 2010 6:41am | Edited 7:07am
Quoting Fudomyo

Maybe risking a few hundred dollars on a potentially bad trade isn't that big a deal for some people.

But trading large lot sizes or other people's money, doubling down on losses usually isn't an acceptable practice, for that matter neither is a large DD, so a lot depends on your circumstances.
Percentages are percentages. Whose money it is, or how much, is irrelevant.

For example you might risk 1% of your account on a single entry with a single stop. I might risk 1% averaging down trying to 'guess' a bottom, catch a falling knife, scaling-in and scaling-out etc etc. We both risked the same......1%.

You could argue that my multiple-entry trade management approach has more chance of success as I'm being flexible and giving the market plenty of room to move against me rather than trying to pick an exact price, in fact I hope it does move against me sometimes in order to build a reasonable position!

Like I and others have said, pretty much anything goes as long as the trade is planned and risk is managed. It's the unplanned hope-and-a-prayer averaging trades which originally started as a single entry and end up as multiple-entry, the inevitable eventually happens one day! In fact Barings would probably still be in business today had Leeson managed his risk. The problem was unlimited averaging worked for him a few times and he made some extraordinary returns with hardly any (seen) losses. It worked great......until it didn't!

As far as risk:reward, it's often a futile calculation as we can't impose our requirements on the market, we can't have more than it's prepared to offer nor should we limit our upside simply because a goal has been met!

-
  • #113
  • Edited 9:27am May 24, 2010 8:50am | Edited 9:27am
Quoting pipmutt
Percentages are percentages.

You could argue that my multiple-entry trade management approach has more chance of success as I'm being flexible and giving the market plenty of room to move against me rather than trying to pick an exact price, in fact I hope it does move against me sometimes in order to build a reasonable position!
Quote
Like I and others have said, pretty much anything goes as long as the trade is planned and risk is managed. It's the unplanned hope-and-a-prayer averaging trades which originally started as a single entry and end up as multiple-entry, the inevitable eventually happens one day!

Quote
As far as risk:reward, it's often a futile calculation as we can't impose our requirements on the market, we can't have more than it's prepared to offer nor should we limit our upside simply because a goal has been met!



I absolutely agree.
In fact, R:R depends on how you define each individual trade as to itself INSIDE the planned maximum risk, which has to be clearly delimited with a fixed stop and position sizing relative to it, what I would call "nested averaging down".

This should allow to trade multiple timeframes in parallel, that is, a longer-term approach (for example looking for the trend and setup on daily charts, with wide stops), then if price fluctuates against but we are still in the right direction, adding another trade based on a setup emerging on a lower timeframe trend and similar R:R projection, but then average also proportionally the stops so the risk per trade remains the same (if we want to maintain the same position size). And the second trade will most probably have a much better R:R on itself in the end. If you were wrong, the averaged loss is much smaller than the initial risk per trade as planned.

This way you can have a greater flexibility and use several variations of the same system, if the setups are valid each in their own timeframe.
For example, you could have a long term trade, with several medium-sized intraday moves in-between, and even scalp a little if you like that style.

So, meanwhile the longer trade develops, you have plenty of opportunities to add to the winner but cut on the losers earlier. Probably the win/loss ratio will "suffer" a little bit but in exchange the overall R:R is going to improve.

An example:
Let's say you take a short on EURAUD at 1.5140 based on daily technicals and M15 entry, with stops above the second previous candle (1.5320 = 180 pips), targeting around 1.4750 for a start (scope = 390 pips, R:R a little above 2:1). Price goes back up to 1.5250 and you get later on a setup on 15 minute charts to enter at 1.5210. You decide to take the trade with stops above the previous candle high (50 pips) with potential target 1.5100 (R:R still 2:1). You lower then the first trade's stops to 1.5270 = 130 pips = R:R improved to 3:1).

Price reaches 1.5100, you set the stop on that trade at BE+1 and decide to hold. Price breaks thereafter 1.5050 and you start trailing the stops on the second trade, gradually adjusting them at a wider distance (but never behind the previous stop value) when there's a strong pull down, as to allow for pullbacks.

Price is now at 1.4900, you set your stop on the first trade a few pips above the break (1.5060) and you get a better distance for fluctuations (160 pips).

First trade is about 240 pips in the positive, second trade around 300+... you can close now and go to sleep, or also trail the second trade for an even much better R:R in the end. And R:R was never below 2:1 at any time, while risk remained also the same because the stops of the second trade were "borrowed" from the first one. In any case, those are free trades by now.

You could also have scalped on the break (as you got two free trades now) and added a third position at 1.5000, with stops above the break (1:5050) and BE+1 plus direct trailing at 1.4950, but for me monitoring two trades is enough. Anyway that trade would then be at around 80 locked pips by now...

If you decide it's enough for the day and close the two first trades at 1.4900 (240+300), your R:R relative to both trades will be 1.5:1. If averaged on the total max risk, it represents a R:R of 3:1.
And if you took the third trade and close also at 1.4900, it climbs up to a 3.5:1.
Not bad at all tp get 640 pips on a single trading day.


Just a crazy idea I got while trying to improve and merge tight risk rules while keeping my original system. Still under test but it seems to work better that way.

NEVER EVER rely on a manual stop closing approach, not even partial, because sometimes the mind can play subtle games and discipline doesn't always win (and besides you could have a connection glitch somewhere in the way).
  • #114
  • May 24, 2010 9:44am May 24, 2010 9:44am
pipmutts multiple-entry trade management approach above fairly well descibes my typical entrys.....

//---

for many standard systems it's a simple matter to test if multiple-entry would have worked to our advantage... within reason of course....

a very limited example would be teamsky, 3 seperate well placed trades with 6 pip targets..... without the restrictions of the contest those trades could have been placed better still......

would it have been a positive for teamsky to go all in initally 1 combined trade for 6 pips.... code it and see..... what if's like that only take a minute to answer..... within reason of course....

....h
to trade and code, keep both simple... no call to impress....h
  • #115
  • May 24, 2010 1:25pm May 24, 2010 1:25pm
Haven't heard of Dennis Gartman before, but that video is priceless and couldn't be clearer. Lots of people in this thread advocate some form of averaging down. Those people might be absolutely outstanding traders with iron discipline and multi-year profitable track records. Good for them. For the traders reading this who can't honestly say they fit this description, please, don't average down. It only takes one mistake to either wipe out most of your account or dent your confidence. I've almost been there in my first six months of trading, and I know that it is a very slippery dangerous slope. For all the mathematically pleasing examples, and talk of 'imperfect entries' its just not worth the risk folks, and it is absolutely NOT necessary to trade profitably. Successful trading is all about finding a positive edge that suits your personality and that you, with all your natural human weaknesses and biases, can trade consistently. For a lot of people they can't overcome these weaknesses. For those who can, the best bet is to avoid strategies like this that appeal to your weaknesses, and risk as little on each trade as you can. Give yourself every chance to succeed in this difficult endeavour where the odds of LONGTERM success are so small.
  • #116
  • May 24, 2010 1:36pm May 24, 2010 1:36pm
Quoting bevok
Haven't heard of Dennis Gartman before, but that video is priceless and couldn't be clearer. Lots of people in this thread advocate some form of averaging down. Those people might be absolutely outstanding traders with iron discipline and multi-year profitable track records. Good for them. For the traders reading this who can't honestly say they fit this description, please, don't average down. It only takes one mistake to either wipe out most of your account or dent your confidence. I've almost been there in my first six months of trading, and...
Hey just wanna say well said.
  • #117
  • May 24, 2010 2:09pm May 24, 2010 2:09pm
Quoting pipmutt
Adding to a losing position (averaging) is fine, some traders call it scaling-in and there's absolutely nothing wrong with it. Just as long as you have a predefined risk then you can do pretty much anything you like.
An example of a live account is below.

http://www.forexfactory.com/attachme...3&d=1274726520

Do not focus on making money; focus on protecting what you have.
  • #118
  • May 24, 2010 2:09pm May 24, 2010 2:09pm
Quoting bevok
For the traders reading this who can't honestly say they fit this description, please, don't average down. It only takes one mistake to either wipe out most of your account or dent your confidence.
The same could be said for using no stops and there are plenty of traders that don't and are very profitable. The same could be said for trading high leverage yet there are plenty of traders that do it and are successful. It comes down to whether a trader knows how to execute it properly while controlling risk which is the difference between "adding to a loser" and scaling into a position. The people here that categorically say it's wrong no matter what probably got burned once or twice doing it and think it they couldn't pull it off, then no one can and it's not a feasible trade management technique. Complete crap. Scaling into certain trades has allowed me to catch big moves that I wouldn't have caught if I had waited for a retrace or what I think would be the perfect entry. As well as get out of a position with minimal or no loss when technically or fundamentally something changed that changed or made me question my bias. It's definitely not a technique to be used all the time but when used correctly can enhance profits.
  • #119
  • May 24, 2010 5:20pm May 24, 2010 5:20pm
Quote
i agree with pitpmutt. i do the same. as long as you have a defined risk there is nothing wrong with averaging. i average both loosers and winners up and downs and have found out that with a a50 k account a 1/100 leverage and an initial .1 lot position it works perfectly fine. it may not be the most effective in terms on rr but it also saves you a lot of time cause you dont have to try to guess the exact turning point or end of retrace

Well said... proper MM is truly the key to this strategy
  • #120
  • May 24, 2010 6:59pm May 24, 2010 6:59pm
Quoting pipmutt
Whose money it is, or how much, is irrelevant.
Bookmark this post. In 5 years the response you give yourself should be interesting.
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