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why is everyone so afraid to average down?

  • #161
  • May 26, 2010 9:56am May 26, 2010 9:56am
Quoting Sauron
It is interesting that nobody mentioned that "averaging down" is nothing more than money management.
A succesfull trader knows very well that money management is only a way of protecting the capital and correctly applied smoothes the profit curve but by itself can't increase the edge. MM will never turn a losing system into a profitable one and this assertion can be mathematically proved.
Therefore, if someone's approach is sound, he's going to profit in both cases, with a fixed amount invested or averaging down.

Topics like "How averaging...
Position sizing is part of MM - and as been mentioned by several posters.

regards
Enter Signature
  • #162
  • May 26, 2010 9:56am May 26, 2010 9:56am
LasVahGoose indeed did sum it up well. at least what i am saying is not a martingale strategy. How many of you are like me and even with a seemingly great strategy somehow cant seem to get your entry within the %DD? and on the occasions that you wait with great dicipline only to see the trade take off and this fact keeps you betwixed between waiting and trading. Even with a scaling in strategy its not a license to trade at will (carelessly). Mr T. has a method to his approach and has nailed down pre difined risk on a strategy that lets him in to catch that drop or rise without a pull back, but survive if there is a pull back. Not that i trade with my previous method but I have been shown that even breaking my position (still with same over all risk) in to 2 parts would have let me turn just over 25% of my loosing trades into winners. This missing out on the big one some have spoken of is actually the opposite. I have been short since 1.4960 (first small position) which was resistance from march 08, now that trade went against me 200 pips my second entry was going to be 1.5200 which never made it. that initial small position alowed me to enter again @ 1.4450 and I have several more entries since then, as well as have taken profit on those initial entries at 1.2500, now waiting for a pull back for more short entries. I did pretty much the same on GU and gbpjpy. Mabey i am lucky??? I just looked for S/R just like taught. Only diff is I didnt bet the farm on any one position was able to have patients both ways due to Not missing out and not blowing a position. Oh and by the way if it had kept going up I would have lost 5% @ 154.50
  • #163
  • May 26, 2010 11:44am May 26, 2010 11:44am
Quoting ScalpOrDie
Yes, I suppose part of my argument is fast vs slow development of a trade.
It's not as simple as quantity. Yes, a faster trader will make more trades, trade more opportunities. They can trade smaller moves both ways, so in theory could cover a greater total range. I just don't think it works this way in practise, at least not to the extent many believe. Here are my reasons:

- Position trades are far, far better able to let money and time do the work. An intraday trader can only take advantage of say one third of the day, and during that time, the intraday trader doesn't make full use of that time. The trader is usually in and out, so doesn't capture all of the day.

A position trader on the other hand has their money working for them all day, night, and week. Yes, there are risks, but as a whole it is a great benefit to a position trader.

- Position traders can possibly be more aggressive. Faster trades have to consider the possibly of large, quick moves, but the equivalent move for a position trader happens far more slowly, giving them more time to react.

- Not all trades are the same. The best trades I would make as an intraday trader are the trades I take as a position trader. These on the whole are vastly superior to most intraday trades, and by position trading I'm taking full advantage of them as they should often be held overnight.

- OPM. Position trading strategies scale far better. Won't be an issue for many, even if they're good, but it's still a pro for slower strategies.

I'm not suggesting one is superior to the other, but that it's not black and white, and in the end comes down to the trader. I do think that most good intraday traders will outperform most good position traders, possibly quite significantly, but I don't think that it is as simple as concluding intraday is far more profitable than position.

Quote
If you have a good system for position trading weekly and daily with a stop loss of less than 50-100 pips I would absolutely love to have you share it with me. I am not being sarcastic or rude saying that here either. I'm serious.
I don't have any tricks, I just look at faster timeframes to try and be more precise. I don't make entries based on the daily and weekly charts, but on faster charts at points I think have a good chance of survival. What I do might be best described as trying to parlay good intraday entries into longterm positions.

Quote
For someone who is not capitalized, and most beginning traders are not, 100 pip SLs are not feasble.
Smaller lots? I trade through an ECN that allows precise trade sizes, so I don't have any experience with lots. With my broker, 100 pip stops with small capital is certainly feasible. There is a point where the costs are too high, but that would be in the thousands, not tens or hundreds of thousands.

Quote
Making 20-50-100 pips a couple times a day and magnifying your gain by trading multiple lots seems to me a lot better than sitting around and waiting for weekly or daily to develop.
I make as much per pip on position trading as I do on intraday trading, the only difference is that it takes a little longer to build up to that with position trading. I also don't have to wake up and have to start all over again, I just add or subtract throughout the day.

Quote
Being flexible allows you to jump on the market any which way it trends intra-day. Cutting your losses, taking your profits depending on the price action of the market. Getting back in and doing it all over again. If you are good at entry and not greedy at exits there is plenty of money in that.
Position trading can be quite flexible, it just comes down to the trader and how often they are prepared to make adjustments.

Sure there's plenty of money. If the trading is good, fortunes can be made either way.

Quote
Really I am just sharing my opinion on the styles of trading and their pros and cons, however there is merit in being flexible in a constantly shifting market.
A good trader is flexible, regardless of timeframe. The timeframes do have their pros and cons, and I listed some earlier in the post, but in the end profitability comes down to the trader, and this is my overall point. Both can achieve returns that would seem ridiculous to most people, and enough to turn a little something into a fortune pretty quickly.
  • #164
  • May 26, 2010 12:23pm May 26, 2010 12:23pm
Quote
I'm not suggesting one is superior to the other, but that it's not black and white, and in the end comes down to the trader. I do think that most good intraday traders will outperform most good position traders, possibly quite significantly, but I don't think that it is as simple as concluding intraday is far more profitable than position.

nor am i saying this at all; however the probability of long term sucess is questionable to a intraday trader based on emotional maintenance and probability over expectancy.
  • #165
  • May 28, 2010 12:35am May 28, 2010 12:35am
Quoting Fudomyo
Clients don't like drawdowns. They like slow, steady growth without large swings in account equity.
Sure, but there's no reason why averaging or any other system should change that.


Quoting Fudomyo
If you've traded 40 full lots or higher, a 200 pip drawdown can be a nauseating experience. It's pretty much the sticker price on a new Lexus LS.
That's the benefit of working in percentages rather than dollars and cents.

Quoting Fudomyo
So, while it's easier to draw down when one is trading a smaller account, it's a completely different story as the stakes increase.
It really shouldn't make any difference, that's a psychological issue.

Quoting Fudomyo
The problem with this thread is people are talking cross purpose. The term "averaging down" covers too wide an area so can be interpeted many different ways.

I was responding to the concept of Martingale trading, picking tops and bottoms, and doubling down on losses. The issue with trading this way is it requires very deep pockets, and there is always that one time when the market doesn't come back around, a black swan event that wipes these traders out completely.
Anything goes as long as risk has been defined beforehand.
  • #166
  • May 28, 2010 1:52am May 28, 2010 1:52am
Quoting Mr J
It's not as simple as quantity. Yes, a faster trader will make more trades, trade more opportunities.
I deleted most of the quote for the sake of brevity, but thanks for your insightful and honest post. You left me with a lot of things to consider. I definitely agree the pros and cons of the various styles are much more grey than black and white. And believe me, as an intra-day trader mostly (where I make my biggest gains) there is that dread sometimes of starting the engine all over again the next day. I have had some success with position trading and swing trading in the past, but not as much. Thanks to your post, I think I'll keep going at it.

It just seems the entries are more difficult than the exits for position trading especially, and it is the exact opposite for trading intra day. I could see how anyone could benefit from working on more precise entries with a view towards taking a position.
Thank you Lux!
  • #167
  • Edited 11:18am May 30, 2010 10:56am | Edited 11:18am
There's no benefit in working purely in percentages. In the end, percentages are real dollars and cents.

P&L, quarterly dividends, and client relationship management are all that matter, not some hypothetical theory. There's a big difference between trading psychology and good business practice, so it's important not to confuse the two.

In a nutshell, detaching yourself from real world consequences is never an advantage. If I were a client and you responded this way to me, I would withdraw my funds immediately.

If you're managing large accounts or have personally taken a $100,000 (or greater) drawdown, I'd be interested in hearing more about your experieces and insight on the matter. If not, there's no point continuing this conversation.

Quoting pipmutt
Sure, but there's no reason why averaging or any other system should change that.



That's the benefit of working in percentages rather than dollars and cents.


It really shouldn't make any difference, that's a psychological issue.


Anything goes as long as risk has been defined beforehand.
  • #168
  • May 30, 2010 2:44pm May 30, 2010 2:44pm
Quoting ScalpOrDie
It just seems the entries are more difficult than the exits for position trading especially, and it is the exact opposite for trading intra day. I could see how anyone could benefit from working on more precise entries with a view towards taking a position.
We have to find something that not only works for us, but something that suits us. Some may be better at one timeframe, others may prefer another. I seem best at position trading, as well as it being what I enjoy. I've probably over-argued precise entries in this thread. In theory, the improvement is massive, but in practise I think it's more of a minor boost. I think what keeps position trading competitive is natural pyramidding, higher quality trades, and exposure around the clock.

Back to precision, someone around here came out with a great line the other day: "Good enough today is better than perfect tomorrow". I'll put it into my own words and add it to my sig, just to make sure I remember it.
  • #169
  • May 30, 2010 3:03pm May 30, 2010 3:03pm
Quoting Fudomyo

In a nutshell, detaching yourself from real world consequences is never an advantage. If I were a client and you responded this way to me, I would withdraw my funds immediately.

If you're managing large accounts or have personally taken a $100,000 (or greater) drawdown, I'd be interested in hearing more about your experieces and insight on the matter. If not, there's no point continuing this conversation.
On the contrary, if a fund manager started talking to clients about drawdown being a nauseating experience because it's 'pretty much the sticker price on a new Lexus LS' they would most definitely run a mile!

The yardstick and measure of performance is return and the risk it took to make it, in percentage terms. Dollars and cents mean very little unless referenced to in a wider context.

Asking if someone has taken a 100k drawdown is a perfect example of the point I'm making. 100k drawdown on 10m (1%) might be perfectly acceptable, whereas 100k drawdown on 200k (50%) quite obviously wouldn't! Simply saying '100k drawdown' means diddly.

Anyway I don't wish to belabour the point, either it's a concept you understand....or it isn't.
  • #170
  • Edited 9:10pm May 30, 2010 7:36pm | Edited 9:10pm
You've taken two entirely seperate statements I made and combined them. When I spoke about a $100,000, I clearly stated it was my personal sentiment concerning risk on my private account, that statement had nothing to do with trading for clients.

Of course, if you were trading a $10,000,000 account for a hedge fund that figure is an acceptable risk, and it would be ridiculous to say it's "nauseating".

My statement concerning client risk was in relation to Martingale trading and doubling down on losses which often exceed these boundaries.

I misunderstood your comment regarding "any other system" to include the above, but we seem to be in agreement concerning acceptable percentages for risk.



Quoting pipmutt
On the contrary, if a fund manager started talking to clients about drawdown being a nauseating experience because it's 'pretty much the sticker price on a new Lexus LS' they would most definitely run a mile!

The yardstick and measure of performance is return and the risk it took to make it, in percentage terms. Dollars and cents mean very little unless referenced to in a wider context.

Asking if someone has taken a 100k drawdown is a perfect example of the point I'm making. 100k drawdown on 10m (1%) might be perfectly acceptable,...
  • #171
  • May 31, 2010 2:15am May 31, 2010 2:15am
Quoting Fudomyo
You've taken two entirely seperate statements I made and combined them. When I spoke about a $100,000, I clearly stated it was my personal sentiment concerning risk on my private account, that statement had nothing to do with trading for clients.
Which is why I said working in percentages the way we do can overcome some of the psychological issues associated with trading in big figures. That's all it is, a psychological barrier, the numbers should stack up regardless of whether one has a $100 account or a $1m account. If drawdown is 100k then one would assume upside is comparable so it's all relative.


Quoting Fudomyo
My statement concerning client risk was in relation to Martingale trading and doubling down on losses which often exceed these boundaries.

I misunderstood your comment regarding "any other system" to include the above, but we seem to be in agreement concerning acceptable percentages for risk.
I include martingaling in 'anything goes'. Like any system or strategy it's only when it exceeds risk boundaries because of poor trade planning, ineffective money management, or the discipline to rigorously apply both that it becomes a problem.
  • #172
  • May 31, 2010 5:04am May 31, 2010 5:04am
Certain trades deserve certain gain/loss. If I expect a dead cat bounce, then that trade is worth what its worth. Removing the $ value and looking at the point or Pip value instead sometimes validates the trade, for what the trade is worth. I am a short term trader, that is I take profit for trades at different levels. micro short term, short, med, long. short and micro keeps me interested frankly speaking, I can think of many things more interesting than trading but its the time/ reward factor.
  • #173
  • May 31, 2010 5:08am May 31, 2010 5:08am
Sure...anything goes, but it doesn't mean it's best practice.

It's not that I don't understand that it is possible to trade small enough lot sizes where someone can go 1000 points into the red and wait for the market to come back around, that's easy to get. What I have difficulty understanding the efficiency or necessity of it.

Sure, if someone wants to they can get on a train in the wrong direction, ride it to the last stop, then ride it back until it gets to where they want to go.

Just because something's possible doesn't mean it's sensible.

For me maintaining healthy daily account growth and not drawing down large amounts makes sense. By working within tight parameters this allows me to trade larger lot sizes and compound profits at a faster rate then spending large amounts of time waiting for trades to come back around. I don't like drawdowns, and don't like giving points back so have developed a trading method that fits my needs. Scale of drawdown isn't a psychological barrier for me, it's just something I've spent a great deal of time learning how to minimize.

To each his own.


Quoting pipmutt
Which is why I said working in percentages the way we do can overcome some of the psychological issues associated with trading in big figures. That's all it is, a psychological barrier, the numbers should stack up regardless of whether one has a $100 account or a $1m account. If drawdown is 100k then one would assume upside is comparable so it's all relative.



I include martingaling in 'anything goes'. Like any system or strategy it's only when it exceeds risk boundaries because of poor trade planning, ineffective money management, or the...
  • #174
  • May 31, 2010 4:45pm May 31, 2010 4:45pm
Quoting Fudomyo

To each his own.
Exactly! One man's waiting can be another man's opportunity.

There's nothing to stop anyone doing both though. Short term intraday trades as well as longer term positional trades. The former with tighter stops/higher leverage, the latter with relatively little leverage (if any) and scale in, out, back in etc etc. It's not so much a matter of waiting for the market to come back around as having a bias (usually fundamentally based) and positioning oneself ahead of the crowd, sometimes catching the start of some spectacular moves in the process.

'Best practice' is whatever produces the goods in my book!
  • #175
  • May 31, 2010 7:13pm May 31, 2010 7:13pm
Quoting pipmutt
'Best practice' is whatever produces the goods in my book!
Yep.

It's been fun chatting. Market's are open again, so back to work.

Good luck with your trades.
  • #176
  • Jun 2, 2010 6:42pm Jun 2, 2010 6:42pm
Let's say you have a profitable system that's been backtested several years or more and foward tested, and the result is that consecutive losses are minimal (3, for example), while at same time have many more consecutive wins. So, you're at a point where you're considering averaging down to increase profitablity and come up with 2 possible routes to take:

1) Adjust system parameters for averaging down and for no more than maximum of 3 consecutive times (or no more than same number of consecutive losses from your test results) because you feel confident based on backtesting/forward testing that overall profitablity will increase. Re-test afterwards and make decision based on results.

2) Do not re-program and leave as is because your consecutive losses are minimal and since the system performs fine without averaging down.

While I realize that testing is no guarantee of future results because market conditions change, there is possible basis for averaging down in #1 above eventhough I'm personally not an advocate of doing this. However, I wouldn't advise ever trying it without testing beforehand.
  • #177
  • Jun 15, 2010 10:27pm Jun 15, 2010 10:27pm
Quote
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...

mathematically you're right but technically it could be a case for debate.

typically, i scale both ways, in my opinion its just about adaptability to market conditions. its more of an art then maths

cheers
  • #178
  • Jun 15, 2010 10:31pm Jun 15, 2010 10:31pm
Quoting jest1081
mathematically you're right but technically it could be a case for debate.

typically, i scale both ways, in my opinion its just about adaptability to market conditions. its more of an art then maths

cheers

Just curious, are you full time trader ?
  • #179
  • Jun 15, 2010 10:34pm Jun 15, 2010 10:34pm
Quoting songbo
Just curious, are you full time trader ?
how do i put it?
i work but i trade full time too. lol!
  • #180
  • Jun 15, 2010 10:40pm Jun 15, 2010 10:40pm
Quoting jest1081
how do i put it?
i work but i trade full time too. lol!
I see... Iphone fx trader..lol ?
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