is Averaging Down Profitable? | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

'Averaging Down Is for Losers' - valid or not? 27 replies

Averaging Down 121 replies

Fast Averaging versus Slow Averaging 1 reply

Averaging Down with Support & Resistance 12 replies

Martigale and Averaging Down 4 replies

Attachments: is Averaging Down Profitable?
Exit Attachments

is Averaging Down Profitable?

  • Poll

  • Is it Profitable to Average down with same stoploss as 1st trade?
  •  
  •  
  •  
  • #1
  • First Post: Edited Feb 20, 2011 2:49am Feb 19, 2011 1:09pm | Edited Feb 20, 2011 2:49am
Hi,
Averaging down is a strategy that is used to lower the average entry price of a trade, so it become in average better price.

As a programer, after 3 yrs experience in automating trading and testing...
I have come into conclusion that,
averaging down is profitable strategy!
but, with the
following condistions:
1. set 1st trade with 20% of regular lot size, SL and TP levels.
2. if trade goes agains you, set 2nd trade with 30% of regular lot size, cause the stoploss is closer
3. if trade goes agains you, set 3rd trade with 50% of regular lot size, cause the stoploss is closer
4. Set Same SL/TP : all trades have same stoploss, take profit levels like 1st trade

you can use buy limit or sell limit after 1st trade.
Advantages compared to 3 trades * 33% of regular lot size in same price:
1. %DD is reduced.
2. total profit is bigger. (backtesting proof)
3. Average Pips per trade is bigger.

want to hear your opinion.
Don't forget to vote ^ above ^ :-)
  • #2
  • Feb 19, 2011 1:29pm Feb 19, 2011 1:29pm
You haven't mentioned Take Profit levels.

If you take the 1st trade at 20% of regular lot size,
and it doesn't move against you.... there would be no averaging.

So it reaches your profit target (whatever that may be)...

You now have a system that has the smallest position when
a trade initially moves in it's favor.

Likewise, you will have the largest position as trades move against
you.

So many other factors to consider, size of stop-losses, profit target areas, etc...

Wider stop-losses in general promote higher win trade % rates...
but are they more profitable overall?

It's a difficult question to answer...
  • #3
  • Feb 19, 2011 2:48pm Feb 19, 2011 2:48pm
Answer= NO it does not work. This is not like stocks or mutual funds. Dollar cost averaging (DCA) doesn't work for a small individual retail trader like everyone here.

Think im wrong? If you could say I have a "bad habit" when trading forex, this dollar cost averaging would be it.

a good rule you will here often from Successful traders, is never add to a losing position, specially not to offset your other trades.

Unlike stocks or mutual funds it is not suggested that you buy them on a regular basis to DCA your positions. Stocks and mutual funds are meant to only go up. So sometimes you buy when you are in the red and sometimes you still buy when you are in the green.

In forex, there are trends up and down and all around, and they are not forgiving as they are not suppose to or have to go "your way" it really sucks to be in a position where you are trying to TELL THE MARKET WHERE TO GO. becuz the market will listen to you for a second then spit it back in your face. haha.

No matter what your strategy is with Dollar Cost Averaging, it will fail WITH TIME. You may have amazing success for a while, but ultimately, it will fail.

~ I trade 5 days every week and still find myself doing it, and once i realize i just f//ked myself by doing so, i press the "close all" button to save my account and my mind from future torture.
  • #4
  • Feb 19, 2011 3:14pm Feb 19, 2011 3:14pm
don't do it for forex.

This is not stocks.

But even for stocks you shouldn't be doing it anyway.

Unless you are an investor. Who will buy and hold stuff for 15 years.
  • #5
  • Feb 19, 2011 5:09pm Feb 19, 2011 5:09pm
Quoting MidasFX
No matter what your strategy is with Dollar Cost Averaging, it will fail WITH TIME. You may have amazing success for a while, but ultimately, it will fail.

~ I trade 5 days every week and still find myself doing it, and once i realize i just f//ked myself by doing so, i press the "close all" button to save my account and my mind from future torture.
This is typically what you'll hear from someone who hasn't figured out how to use it correctly. No offense intended to this person. The fact that when this person has to close all the trades in order to "save my account" means they did not factor in risk when using this technique.

When a trader adds to a losing trade it's usually when they have reached their risk level for that trade and when averaging incur more risk trying to dig themselves out of a hole versus planning on scaling in over a range prior to placing the first trade and having a max risk already defined for that position. There is a major difference between the two that seems to elude a lot of traders.

I use it quite often on a trade by trade basis because of the time zone I reside in which doesn't make it easy for me to trade the London session. If I am biased long but expect price to pullback going into the London session (which happens quite often) I will get in with a trade and scale in with limit orders if the price drops but always having a stop for the position and never exceed my max risk as if it was a single trade. If price takes off and doesn't retrace I am still in a position to profit and if it retraces I can build a larger position before the trend resumes. Some will just place an order around where they expect the price to retrace to but if it doesn't happen and price just takes off then they are left with no chance to catch the move.

As far as the argument that seems to always be used about a bad risk/reward when you only have one order that gets picked up, well, that's rubbish. No one knows the reward side ahead of time. Price could go three time what you expected or you can do what I usually do is wait for a retrace and add to the winner getting up to or close to my full position size and trail the stop. But it really boils down to you can either put yourself in a position (no pun intended) to make some profit or not. I would rather make some even if it's not as much as I wanted (like it ever is!) or expected.

Having said that it doesn't matter if it works for me or doesn't work for the other people who responded. It only matters if it works for you.
  • #6
  • Edited 6:32pm Feb 19, 2011 6:14pm | Edited 6:32pm
Personally, I have come to the conclusion that averaging down is the only way to make large sums of money at the FX game. The high volatility of the FX market, along with its high leverage, makes it almost impossible to go "all in" at once. I simply have not found any type of conservative alternative to replace it. However, there are two major negatives associated with averaging down......#1 - You will be down significantly as the play progresses; so you can throw your conservative 30 pip stop loss rule out the window. #2 - You can absolutely destroy your account if you don't know when to average down your position.

When averaging down, you will find yourself making $400 five straight times and then out of the blue, you will have a $700 loss, for instance.....then five straight $400 wins and then a $750 loss. Basically, If you are not ready to lose big, you will not be ready to win big.
  • #7
  • Feb 19, 2011 10:34pm Feb 19, 2011 10:34pm
Quoting lolik2020
Hi,
Averaging down is a strategy that is used to lower the average entry price of a trade, so it become in average better price.

As a programer, after 3 yrs experience in automating trading
and testing...
I have come into conclusion that, averaging down is profitable strategy!
but with the following condistions:
1. your 1st trade was with 20% of regular lot size
2. your 2nd trade was with 30% of regular lot size cause the stoploss is closer (can use buy limit or sell limit)
3. your 3rd trade was with 50% of regular lot size cause the...
Hello sir, in my opinion, averaging down as long as it is the part of your strategy which you have been planning before you take the trade (put an order) is good. Why? because you have estimated and understand the risks. But, if you are randomly averaging down, there is a chance you will blow your account. Even if you have a well result back tested system. Why? because market will suddenly changed and act just like there is someone behind it who want to take all of your money, seriously. I state this based on my personal experience, sounds ridiculous like put a buy order in the highest price and sell order in the lowest price and persistently averaging down until the day you can't stand the negative floats or your account balance reach zero. And think about the opportunities you've loosen when you are persistently holding a losing trade, while you can just cut it off and take another profitable trade.

Trade well sir
  • #8
  • Feb 19, 2011 10:50pm Feb 19, 2011 10:50pm
“….. after the initial transaction, don't make a second unless the first shows you a profit. Wait and watch. That is where your tape reading conies in to enable you to decide as to the proper time for beginning. Much depends upon beginning at exactly the right time. It took me years to realize the importance of this.” Jesse Livermore
The Thief of Wall Street
  • #9
  • Edited 12:30am Feb 20, 2011 12:16am | Edited 12:30am
Quoting lolik2020
Hi,
Averaging down is a strategy that is used to lower the average entry price of a trade, so it become in average better price.

As a programer, after 3 yrs experience in automating trading and testing...
I have come into conclusion that,
averaging down is profitable strategy!
but, with the
following condistions:
1. set 1st trade with 20% of regular lot size, SL and TP levels.
2. if trade goes agains you, set 2nd trade with 30% of regular lot size, cause the stoploss is closer
3. if trade goes agains you, set[b] 3rd trade...
Let's make an example for this method.

Averaging Down

Assume that we have a method with TP=100 and SL=100 (this static TP and SL is used to simplify our example, in real practice, TP and SL should be based on S/R and the size can be different for each trade).

1. We buy 0,2 lot as first entry
2. When market move down 30 pip, we buy again 0,3 lot
3. When market move down again 30 pip, we buy again 0,5 lot

With this entry method, how much is our loss when we loss?
Loss: (100*0.2) + (70*0.3) + (40*0.5) = 20 + 21 + 20 = 61


With this entry method, how much is our profit when we make profit?

Scenarion 1: Market move to our TP immeadiately after entry

Profit: 100*0.2 = 20
RRR = 20/61 = 0.33 (I prefer to use Reward to Risk Ratio instead or Risk to Reward Ratio)


Scenario 2: Market move down and trigger our 2nd pending order before hit out TP

(100*0.2) + (130*0.3) = 20 + 39 = 59
RRR = 59/61 = 0.96


Scenario 3: Market move down and trigger our 2nd and 3rd pending orders before hit our TP

(100*0.2)+(130*0.3)+(160*.0.5) = 20 + 39 + 80 = 139
RRR = 139/61 = 2.28


No Averaging Down

If we use TP and SL = 100 and don't use averaging down, RRR = 100/100 = 1.

------------------------------------------------

if we assume that Scenario 1, 2, 3 occurrs at the same frequency in our profit trades then our RRR will be (0.33 + 0.96 + 2.28)/3 = 3.44/3 = 1.19
then in this situation, averaging down is better then no averaging down.


Now, which one is better, averaging down or no averaging?
It depends on market and your entry signal.
If within your entry signal, market move to your trade direction more frequently than move down first before hit your TP, then no averaging down is better.
If within your entry signal, market move to your trade direction less frequently than move down first before hit your TP, then averaging down is better.

The most important is how we choose our SL. No matter which method we use, averaging down or not averaging down, as long as our SL is hit more than our trading system expects, then our trading system is not a profitable one.

With this example, I disagree with statement that averaging down is (always) a loser method.
Averaging down without a good SL is a loser method. However, no averaging down without a good SL is also a loser method.

Averaging down can be more profitable than no averaging down and vice versa, depends on market,
  • #10
  • Feb 20, 2011 2:43am Feb 20, 2011 2:43am
Quoting Special One
Loss: (100*0.2) + (70*0.3) + (40*0.5) = 20 + 21 + 20 = 61
one more thing : %DD is reduces from 100 pips loss to 61 pips loss !
  • #11
  • Edited 4:33am Feb 20, 2011 3:16am | Edited 4:33am
Quoting Special One
if we assume that Scenario 1, 2, 3 occurrs at the same frequency in our profit trades then our RRR will be (0.33 + 0.96 + 2.28)/3 = 3.44/3 = 1.19
then in this situation, averaging down is better then no averaging down.
your assumption is incorrect. giving those 3 scenarios, scenario 1 occurs most often, then scenario 2, then scenario 3. the farther the price went away from tp, the lower its probabilities to reach tp.
  • #12
  • Feb 20, 2011 3:57am Feb 20, 2011 3:57am
Quoting sangmane
your assumption is incorrect. giving those 3 scenarios, scenario 1 occurs most often, then scenario 2, then scenario 3. the farther the price went away from tp, the smaller its probabilities to reach tp.
same what i thought

the more a trade goes against you, the shorter the distance to the stop loss the higher the probability to lose the trade
the more a trade moves in your direction the higher the probability to reach your profit target (if you have a fixed one)

your strategy seems to add to losers and limit profits, exactly the reverse of the statement: cut your losses and let your profits run. that may be the preferable strategy in a consolidation, ranging- or countertrend environment, all scenarios in which i would use fixed profit targets, consistent with your other thread.
Invincibility lies in the defence, the possibility of victory in the attack
  • #13
  • Feb 20, 2011 3:59am Feb 20, 2011 3:59am
Quoting sangmane
your assumption is incorrect. giving those 3 scenarios, scenario 1 occurs most often, then scenario 2, then scenario 3. the farther the price went away from tp, the smaller its probabilities to reach tp.
right!
if we assume that
scenario occurrs not at the same frequency but with
folowing ratio :
Scenario 1 occurrs 3 times
Scenario 2 occurrs 2 times
Scenario 3 occurrs 1 time,
then our RRR will be :
(0.33*3 + 0.96*2 + 2.28*1)/6 = 5.2/6 = 0.87
RRR is reduced but,
%DD is reduced: from 100 pips to 61 pips loss average
  • #14
  • Feb 20, 2011 4:58am Feb 20, 2011 4:58am
Quoting sangmane
your assumption is incorrect. giving those 3 scenarios, scenario 1 occurs most often, then scenario 2, then scenario 3. the farther the price went away from tp, the smaller its probabilities to reach tp.
Yes, of course scenario 1 is happen more often than scenario 2 and 3.
I only bring this assumption to make an example.
The average down formula itself can be changed, not necessary the same as lolik2020 describe. Maybe someone can choose to give bigger position size to first entry than third entry.
The bottom line is it is possible that averaging down bring better result than no averaging down.

The third entry (scenario 3) give us lowest SL size. If trader aim for big profit, the result can be very rewarding because RRR will be huge.
  • #15
  • Feb 20, 2011 4:59am Feb 20, 2011 4:59am
Quoting lolik2020
right!
if we assume that
scenario occurrs not at the same frequency but with
folowing ratio :
Scenario 1 occurrs 3 times
Scenario 2 occurrs 2 times
Scenario 3 occurrs 1 time,
then our RRR will be :
(0.33*3 + 0.96*2 + 2.28*1)/6 = 5.2/6 = 0.87
RRR is reduced but,
%DD is reduced: from 100 pips to 61 pips loss average
No, averaging down RRR has to be bigger than 1 in order to beat no averaging down result.
  • #16
  • Feb 22, 2011 1:43pm Feb 22, 2011 1:43pm
Interesting concept, this will definately help with signals that immediately retrace.
  • #17
  • Feb 22, 2011 9:44pm Feb 22, 2011 9:44pm
The last year I've had a lot of success through leveraging my positions. However, I use a very small entry (1 lot), and leverage it at the stronger s/r levels, and after an indication of reversal through candlestick and price patterns.
  • #18
  • Mar 4, 2011 10:36am Mar 4, 2011 10:36am
I have turned $25 into $1700, $1500, $1200, $500 several times and $100 a few times. But, lost every penny within a few days. May be, the strategy is bad. Or, i`m just using it the wrong way... But, as long as the market is a chaotic system, shall we call it a gamble?
  • #19
  • Mar 4, 2011 11:59am Mar 4, 2011 11:59am
Quoting zapper
I have turned $25 into $1700, $1500, $1200, $500 several times and $100 a few times. But, lost every penny within a few days. May be, the strategy is bad. Or, i`m just using it the wrong way... But, as long as the market is a chaotic system, shall we call it a gamble?
The strategy is not bad if you use it correctly. But first, in order for average down to be successful, your initial direction must be correct to begin with. Otherwise, you are simply increase the rate at which you are losing. Being able to turn $25 into $1000+ is not a sustaniable strategy. Because you can simply turn things around and turn $1000 into $25 as well. A sustainable strategy should provide consistent growth over time regardless of the size of the account. And i guess that's what everyone needs to work on. Back to averaging down, it would be best to avoid unless you really know what you are doing. Then in that case i would not really call it averaging down, but simply adding to position to realize more gain.
  • #20
  • Mar 4, 2011 5:41pm Mar 4, 2011 5:41pm
Weren't we talking about this a few days ago in another thread?

Anyway, after much contemplation I've come to the conclusion that if you have a large enough account size, and play within an acceptable level of risk, then average down away.

Speaking from experience, once you break your rules and go beyond that, it's a slippery slope toward nuking your account.
0 traders viewing now