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why is everyone so afraid to average down?

  • #121
  • May 24, 2010 7:02pm May 24, 2010 7:02pm
[quote=Darkstar;3746743]This is the problem with looking at the market as a math equation....


I am sooo glad i found this thread, ha ha. right up my Alley, why is Dave Ramsey one of the most popular radio shows? Is it because people cant figure out the math to get out of debt? NO! its all dedicated to the mind set and making people realize that even the most educated and mathematically savvy fight the constant discipline to achieve the success they desire. I can do the math; however it is hard for me to place a value on the following. for me the maintenance of my Psyche is king. I'm sure all you robots trade circles around me, but lets compare 5yr net. (not bragging) trying to make a realistic pnt.
This is what all this accomplishes:
1. you actually will hope your first positions are negative a very unusual concept (fixes allot of emotional scared money problems)
2. you will then become a strong holder ,oblivious to spikes and news events. (ie.) not easily shaken out.
3. It satisfies the need to be in the market as many newcomers fall prey to. (ie) not up one minute and give it all back and then some the next.
4. When you realize that compounding is the most powerful tool you have, then the slow but positive growth will fuel your success.


all this with total max dd @ 5% and total 4 entries.
  • #122
  • May 24, 2010 10:37pm May 24, 2010 10:37pm
Those of you who defend the averaging down method seem to ignore my main concern and argument.

You all defend the risk reward debate by saying that if price moves down, your RR ratio becomes amazing. That... I do not dispute.

The question is what happens if price moves in your favour from the beginning? What if price never moved against you?


@mr-T:
I have actually done that before. "To hope you are wrong" when you enter the trade is a flawed strategy. After a while, you start to enter randomly - disregarding charts and PA. Why should you care anyway? You are hoping to be wrong. If you are wrong, you make money, if you are right, you make money too! Amazing... but it doesn't work that way.
  • #123
  • May 24, 2010 11:36pm May 24, 2010 11:36pm
Quoting thelws
The question is what happens if price moves in your favour from the beginning? What if price never moved against you?
You ride the trade for as long as the market let's you?
If the trend is established, you can " position trade" bu adding subsequent trades "at a shittier price" as someone said .

Averaging down can work well when the setup appears on a larger timeframe (daily or higher)and despite the fact that relevant lower timeframes are lined up as well, price decides to go make a retest.

On daily charts that could be quite a few pips, and your stops and risk should be defined accordingly.

So, when everything lines up again and provided the direction is still valid, you take a second trade on that new setup, nested inside the first one, which is still valid because stops haven't been hit.

Averaging down on a scalp trade would be suicide, as a comparison...

It will all depend on the timeframe used, and on how you plan for an eventual fluctuation with precise entry points to look for.
If it isn't done that way, but randomly open trades not based on TA, just to "improve" the average entry point, without a previous analysis of the possibilities, it can become a stressful adventure though might be profitable for quite a while.
  • #124
  • May 24, 2010 11:39pm May 24, 2010 11:39pm
Quoting doblece
You ride the trade for as long as the market let's you?
If the trend is established, you can " position trade" bu adding subsequent trades "at a shittier price" as someone said .

Averaging down can work well when the setup appears on a larger timeframe (daily or higher)and despite the fact that relevant lower timeframes are lined up as well, price decides to go make a retest.

On daily charts that could be quite a few pips, and your stops and risk should be defined accordingly.

So, when everything lines up again and provided the direction...
So you are saying that in the event that you are right, it is ok even if your risk vs reward ratio is bad?

What I understand is:
1)It is ok to sabotage the 1:1 min risk reward ratio rule
2)It is ok to have -ve expectancy.

Is this what you are trying to say?
  • #125
  • May 24, 2010 11:58pm May 24, 2010 11:58pm
Quoting thelws
So you are saying that in the event that you are right, it is ok even if your risk vs reward ratio is bad?
As pipmutt mentioned before, we can know the risk, and maybe set the projected reward, but the market will have the last word on this in the end.

Why limit the upside?
Additionally, if you are opening a trade for example on a daily chart, with a 240 pips stop, it is obvious that you are at least expecting (and technically analyzed) 240 or more pips as a target = 1:1 RR

So, if the trade goes directly into the positive, and you have around 100 pips made, you can modify the risk reward by tightening your stops for example to BE +1. There you go, riding a free trade. If you reach your target how much R:R would that be? 0:240?

If it goes into the negative 120 pips, and you open a second trade because there's a setup emerging in that same direction, using the same risk per trade, and setting the stop at the same price and with the same target as the first trade, wouldn't that be a 2:1 RR?

Now you've got two trades. Both are valid as per your rules, and you can simultaneously work on diverse timeframes, even scalping a bit while you wait, always inside the R:R and risk setup that you have chosen, and provided that you do not exceed the maximum total risk per trading day.

It's all relative.
  • #126
  • May 25, 2010 12:03am May 25, 2010 12:03am
Quoting thelws
1)It is ok to sabotage the 1:1 min risk reward ratio rule
2)It is ok to have -ve expectancy.

Is this what you are trying to say?
Not at all. How am I "sabotaging" the 1:1 min risk reward rule?
Read my previous reply.

As soon as you set a stop loss and a risk, you are having a relative negative expectancy which happens to be at least as probable as your positive expectancy (RR 1:1) or lesser.
  • #127
  • May 25, 2010 12:13am May 25, 2010 12:13am
Quoting thelws
So you are saying that in the event that you are right, it is ok even if your risk vs reward ratio is bad?

What I understand is:
1)It is ok to sabotage the 1:1 min risk reward ratio rule
2)It is ok to have -ve expectancy.

Is this what you are trying to say?


This wasn't directed at me but want to throw an answer in based on how I handle it. I'll scale in after the start of a retrace so if only one order gets picked up I can add to it on a break of the last swing high, basically playing it as a 1-2-3 breakout and get my position size up. This will leave a swing low for stop placement so I can still maintain my risk. I honestly don't worry about the reward side too much. Make it 100:1 or 1:1, doesn't matter, you get what the market gives you which you don't determine, the market does. As a trader friend of mine says, "You can only control how much you lose".
  • #128
  • May 25, 2010 12:28am May 25, 2010 12:28am
Quoting thelws
the 1:1 min risk reward ratio rule
Also:
The R:R will depend on your win/loss ratio as well.

You can have a steady growth along the years even with a 1:0,2 RR, if the win/loss ratio is 95/5 (that's about a 1:3,8 RR in the end).

Anyway I got tired of the time it wastes in the end... in the way I was applying it.
But I can't say it wasn't profitable, nor was the risk unmanaged.
Sometimes systems and strategies have to evolve...
  • #129
  • Edited 1:12am May 25, 2010 12:55am | Edited 1:12am
Quoting doblece

we can know the risk, and maybe set the projected reward, but the market will have the last word on this in the end.

Excellent posts, and from others as well, some real insight into what I believe is the true essence of 'trading'!


-
  • #130
  • May 25, 2010 12:58am May 25, 2010 12:58am
Quoting Fudomyo
Bookmark this post. In 5 years the response you give yourself should be interesting.
Quoting pipmutt
Percentages are percentages. Whose money it is, or how much, is irrelevant.

Why bookmark it? Dollar amounts are all relative, we work in percentages, and in this context it shouldn't matter whose money it is or how much it is, why would it make any difference?
  • #131
  • May 25, 2010 1:01am May 25, 2010 1:01am
Quoting thelws
Those of you who defend the averaging down method seem to ignore my main concern and argument.
Quoting thelws

You all defend the risk reward debate by saying that if price moves down, your RR ratio becomes amazing. That... I do not dispute.

The question is what happens if price moves in your favor from the beginning? What if price never moved against you?
...



Well, if you are going to disregard charts and PA that’s a whole nother discussion.

The question is what happens if price moves in your favor from the beginning? What if price never moved against you? ; Then good, small profit is bank baby. Maybe I buy lunch or use that positions money for a risk free entry later? What happens when you are wrong with a 3% position and it spikes 1% outside your maxDD? You just lost money, have you the guts to reenter? ohno! now you see it go the way you had previously thought, do you reenter? If you do, then can you take the beating being wrong 2x on the same position? If we are in the same position you, your way and me mine, and the trade was bad you cut out early lost 3%, I ultimately loose the same money, the diff is that I had more chances to mitigate my initial risk or change my mind. 3% is 3%


If you fall in the category of a sniper that can achieve 60-80% accuracy then I humbly bow. I have friendships with a couple of cats that can do just that; however they have no life and are not trying to get to a pnt of success ie. They have their bank and are living proportionately. In no way are they dependant on this as their living (just an addiction). As matter of fact a form of my approach is there living. and I will add one more thing if anyone is trading short-term successfully without a "true market ineff." then what you are seeing is temporary. Ill put any amount off money on that trade.

the institutions have built positions over time with more money than one can fathom the spikes, false breakouts, news etc, are all forms of manipulation used to exploit weak holders shaking out some large prop. and most retail traders. when the dust settles the trend prevails. what is a trend? is it a touch of sloping lines? NO Is it a bounce off of an ma? NO
it is simply price up or down over a period of time. and the amount of energy(money or exchange thereof) it takes to reverse is phenomenal. the ability to navigate the ebb and flow is directly related to the volatility and max range related to your MM. tip the scale in your favor and widen that range of "being right".



This may address the issues that I think are more prevalent then your mathematical equations.
  • #132
  • May 25, 2010 2:46am May 25, 2010 2:46am
Quote: You all defend the risk reward debate by saying that if price moves down, your RR ratio becomes amazing. That... I do not dispute.

The question is what happens if price moves in your favour from the beginning? What if price never moved against you?




You buy more at the next pull-back (i.e. average up) - always provided your belief is that the move might continue.

The discussion mixes too much opinion about market direction with entry technique.

Whether you enter by averaging into a position or not is one matter.

The question 'what if afterwards' is a completely different one and not relevant as long as either way of entry has overall risk-control.

Whichever way one trader chooses to get in the market, there are two MAIN outcomes:

1) the price will ultimately move in your anticipated direction, or,

2) the price will ultimately not move in your anticipated direction.

I say ULTIMATELY because in either case between being stopped out OR reaching your personal target, many many things can happen and usually do.

Let's look at it this way: based on your sound analysis, you have figured a 100 pip stop (for illustration purpose). You can afford to buy 10 standard lots with that stop and your target (whether it will ever be reached is not relevant at that moment) is 300 (RR 3:1).

The mindset of the trader who is looking at PROFIT PER TRADE as the deciding factor will most likely buy the full 10 lots and hope the trade will take off without looking back at all - and maybe, very rarely that happens. Usually these promises about market and price behaviour are made by system sellers but that's by-to-by.

The mindset of the trader who is looking at RISK PER TRADE as the deciding factor will more likely assume that nothing is ever going according to plan and he (having the same % risk - or 100 pips on 10 lots) will enter 2 lots at first. Then the price goes up (yippeeee). Then the price turns to revisit a previous support (which coincidently is somewhere just above the stop). There he enters another 2 lots. As long as the overall stop is respected, the second trader is simple more careful and while he might get stopped out as well (at -100 pips), his loss will be smaller (yes, you can do that with the right way of averaging into a trade) - and his smaller initial profit profit (in case the trade takes off from the beginning) will be compensated over time by smaller losses.

In this discussion, please don't forget that trading does not have to be like a horse race where you have to place your full bet before the race starts, so to speak. You can start betting smaller at the beginning and if your horse falls back (i.e. price goes against you but is still within your predetermined stop distance), you can still back it by increasing the bet (averaging).

If one only trades for 15 pips at the time, there is no point in averaging - but many trend traders who might have a few positions per year only use this way of getting into the market with great success.

Most quantitative methods with fixed position size probably don't use this way of entering the market.

Good trading.

regards
daytrading
Enter Signature
  • #133
  • May 25, 2010 2:50am May 25, 2010 2:50am
Quoting thelws
The question is what happens if price moves in your favour from the beginning? What if price never moved against you?
I don't enter with the intention of losing a trade, but if the market retraces and offers better prices, I'll take advantage of it. I don't usually scale in though, as most of my entries are standard entries. When I do scale in, it's to limit initial risk on very tight entries, and I only do it when price moves my way.

Quote
Why should you care anyway? You are hoping to be wrong. If you are wrong, you make money, if you are right, you make money too! Amazing... but it doesn't work that way.

He's not hoping to be wrong, he's hoping to be wrong in the shorterm, but very right in the medium to longterm. There's a huge difference.
  • #134
  • May 25, 2010 5:39am May 25, 2010 5:39am
Quoting mr-T
What happens when you are wrong with a 3% position and it spikes 1% outside your maxDD? You just lost money, have you the guts to reenter? ohno! now you see it go the way you had previously thought, do you reenter?
This and DTs post pretty much nail the differences and advantages of averaging down, and explain why you get such polarised opinions on it. If you're more systematic in your trading style, averaging down makes no sense. If you're more discretionary, it's much clearer to me now why & when you would.
My discretion knows no bounds, I abandoned it many moons ago, which explains which side of the fence I fall.
Great thread.
  • #135
  • May 25, 2010 1:47pm May 25, 2010 1:47pm
Quote
Lonestar: 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.

You misunderstood my point, I'm not talking about the legitimacy of averaging down as a trading technique, or that its 'wrong'. I'm saying that successful trading is far more about the trader than any technique - we are our own biggest business risk. If you're not an experienced trader who has mastered discipline and is producing consistent results, I honestly believe you are completely wasting your time thinking about averaging down for the reasons I've mentioned previously. As you say, trading without stops and trading with high leverage can be profitable as well, however they also leave you open to huge risk especially when you haven't mastered trading. They will almost certainly come and bite you - why bother taking the risk?

The old familiar advice is mostly right, cut your losses short, let your winners run, trade with the trend etc.

In terms of averaging down as a technique, whilst it won't stop you being profitable I wouldn't entertain it myself. I should say that multiple entries when you're trading size and reducing slippage is a completely different thing. My testing with a variety of entry techniques shows that averaging down just leads to full positions every time you're wrong, and half or even a third sized positions when you're really right and price just takes off with no pullback. Most of the really big trades (those ones that make your month, or if you're longterm your year) seem to happen without much of a pullback at the beginning. If you've only got a small position on in those trades it has a massive effect on your bottom line. Once again, not to say it can't produce a profit (experiment with it) just I've found its suboptimal. Experiment with scaling in by buying strength as price recovers from a pullback though, slightly better than just putting buy orders in below your initial (too high) entry.

Not having stops on the other hand definately does produce bigger profits, but in my opinion the risk is too high. If you get wiped out because of one break of discipline/exchange or broker goes down/you get sick or whatever else . . . those hypothetical results will be just that!

Long term success depends on trading REALITY, and having a REAL understanding of the risks and problems that might only happen once in a blue moon but can end your career. Everything you can do to remove these risks (human factors are the biggest ones) is worthwhile.
  • #136
  • May 25, 2010 4:28pm May 25, 2010 4:28pm
Quote
In terms of averaging down as a technique, whilst it won't stop you being profitable I wouldn't entertain it myself. I should say that multiple entries when you're trading size and reducing slippage is a completely different thing. My testing with a variety of entry techniques shows that averaging down just leads to full positions every time you're wrong, and half or even a third sized positions when you're really right and price just takes off with no pullback. Most of the really big trades (those ones that make your month, or if you're longterm...

Quote
I would like to hear from anyone who has been achieving long term (i.e. more than three years) great returns using these methods. I think they're few and far between.
[/quote]I can say first hand that mr T has and is very profitable using exactly this approach. and since he has been personally guiding me, (THIS IS IN NO WAY HAS ANY THING TO DO WITH A SERVICE OR ANY MENTORING), I have had such a calm spirit and actually been able to take advantage of more opportunity trading this way. when i was trying to hone in my precision there was just to many times that i wouldnt pull the triger because it wasnt perfect and times when i would due to lack of patients or frustration after missing a trade. Just think of the trades you get wrong just over max DD+ the trades that drive near the brink of stoploss. for me those trades (if i where in the same position as you)are trades where i profit or leave a risk free trade to run...

To comment on the small initial profit on the first entry: If you dont have that problem with dd and emotions Ie your system is just that dang good, then kudos to you!!! However I have made the statement on another thread about this matter , your assumtion is that you have the "gahoonas" to let a full position ride to the sunset. I have offten argued if you simply flipped most retailers accounts you would be in profit. I also argue its not a system they need, allot of it is simply the fact that when they see that profit on the table spike up and then retrace they get scared of giving back that they take profit, and vice versa on dd "it will come back" the larger the loss the harder to cut.... The reality atleast for me now is I can have runs of success on precision trading but much more sustainable taking the emotions out, Old cliche' " better to be out of a trade wishing i was in then in a trade wishing i was out."
  • #137
  • May 25, 2010 4:36pm May 25, 2010 4:36pm
Quote
better to be out of a trade wishing i was in then in a trade wishing i was out."

Excellent phrase... it's going in my Forex quotebook
  • #138
  • May 25, 2010 6:15pm May 25, 2010 6:15pm
Very true words! Its good that you have someone successful helping you, I think you're in a very advantageous position, something I wish I had had in my first couple of years.

Look, if you find averaging down takes the emotions out of it and you can clinically do it, thats good, as long as you respect that final stop. Getting unemotional is absolutely vital.

Get yourself some trading simulation software or backtesting software (or even just an Excel spreadsheet and historic charts) and work you way through trading your method over a LONG period of time to make sure you really do win overall. For a low cost solution there is a bit of software called Forex Tester which isn't too expensive and that has free data going back to the early 2000s, or better than nothing Metatrader with historic data. I haven't used it for a long time but I remember you could download data from one of the brokers.

Then try letting your profits run with different types of exit (maybe a trailing stop at a slow moving average, a 'chandelier' trailing stop, profit targets at a wide Bollinger Band, donchian channels, an Directional Indicator cross). I found it very frustrating stepping back and letting my profits run, watching them rise and fall, seeing trades lose profit. The end game though is whats important, and hopefully you'll see the benefit of being patient. You've got to see and discover it for yourself I think.

Entries - yeah they help, but I've seen some surprisingly simple entry signals that most people on these forums would laugh at produce great profits using a good exit. Never seen a good entry work without a great exit though. If you've got someone competent helping you to keep you honest, and you're doing everything you can to make sure you don't do what 90% of people do and average down that extra time you shouldn't then I wish you every success. Do that testing though - I think you'll find a number of big moves that don't look back which you either would have missed completely, or wouldn't be fully loaded on which would make all the differnence.
  • #139
  • May 25, 2010 6:49pm May 25, 2010 6:49pm
So, for people who use this method... how often do you add to your loosing positions?? (example: every 50 pips)

Also, what time frame are you mostly using??

I'd like to hear from people who are successfully using this strategy
  • #140
  • May 25, 2010 7:56pm May 25, 2010 7:56pm
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,...
Apples and oranges. What you did is world's apart from the proper way to handle it. If 500 pips wipes out 95% of your account you were way over leveraged and then using martingale is just stupid to begin with. Why not give examples that are applicable to the proper way of scaling into a position? All the "horror stories" on this thread for examples of why it's a bad idea are examples of people screwing it up. All that proves is if you don't what you're doing, don't do it!
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