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Averaging Down

  • #21
  • Feb 26, 2011 4:38am Feb 26, 2011 4:38am
Quoting Troikaone1
You have to average up/down "intelligently" in order to make a lot of money in FX....
Interesting statement Troikaone would you mind giving a quick example in terms of a real trade on exactly what you're talking about and how you would do this.?


One more thing... Whats the difference between closing an ("all in") losing position and opening a new one in the same direction if you think its still the right way to trade, and averaging down?

Also whats the difference between closing an "all in" position in profit and then opening a new one, and averaging in...

With the above in mind... What the difference between someone who risks 4% of his/her account on one trade and averages in, and someone else who goes all in with 2% risk?

Answer: The guy averaging in pays the spread TWICE and gets a worse average price...

Food for thought
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  • #22
  • Edited 5:16am Feb 26, 2011 5:01am | Edited 5:16am
To say "you have to master the art of averaging up/down to trade profitably" is ludicrous in my opinion because over 100 open and closed trades (all in) you are essentially doing the same thing, just becasue they're not all strung together in the one trade makes no difference. No matter which way you choose you are taking on an accepted level of risk and trading to an outcome. Averaging won't do anything but either improve or worsen your initial entry or close price. Just like a bunch of different individual trades.

Does no one agree with this? Feel free to disagree I find it an interesting topic one of which I haven't really thought too much about before having always been an all in all out kinda guy!
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  • #23
  • Edited 5:28am Feb 26, 2011 5:15am | Edited 5:28am
I would offer that the only people that need to worry about averaging is the types who if they sold what they own may struggle to get it back if they wanted it back due to liquidity constraints. People who are free to enter and exit the market like most of us don't need to worry about this.
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  • #24
  • Feb 26, 2011 5:19am Feb 26, 2011 5:19am
Quoting CindyXXXX
Interesting statement Troikaone would you mind giving a quick example in terms of a real trade on exactly what you're talking about and how you would do this.?


One more thing... Whats the difference between closing an ("all in") losing position and opening a new one in the same direction if you think its still the right way to trade, and averaging down?

Also whats the difference between closing an "all in" position in profit and then opening a new one, and averaging in...

With the above in mind... What the difference between someone...

Cindy,
Thank You for weighing into this discussion. I noticed you seem to agree with one of my untested theorems. Please, What is your opinion about these theories I am basing my strategy on...

1. The trend is stongest at the begining and weakest at the end, therefore

2. Averaging in gives worse price while averaging down gives better price.Therefore

3. Averaging down methodology, for a newbie, in the long run will perform better than chasing the trend strategy.

I respect your opinion. But ofcourse, I take personal responsibility.

King.
  • #25
  • Feb 26, 2011 5:22am Feb 26, 2011 5:22am
am sorry for the off topic but wanted to know

would my broker see ....
1 entry time frame
2 stop loss
3 take profit
4 indicators
5 ea
6 if I use scripts in entry & exits(already prepared entry & exit numbers)

thanks for the answer in advance. I just wanna be too sure
  • #26
  • Feb 26, 2011 5:24am Feb 26, 2011 5:24am
Have a provision in your money management plan that says, “Don’t average down.” Averaging down means adding to a losing position, and you shouldn’t do it. This is one of the cardinal sins of trading. If you are losing, there is a good reason for it: The trade is no good. If it were any good, you’d be making money on it, not losing. There is no surer way of getting hurt badly than to start adding to a bad position.
  • #27
  • Feb 26, 2011 5:32am Feb 26, 2011 5:32am
Consider this: a bubble is developing as prices diverge from fundamental values. The bubble is growing through sustained excessive optimism and feedback channels, but you know that one day this optimism will end, and prices will drop to, or even below, fundamental values.

Bubbles can be traded by shorting the stock. There are, however, a number of things that have to be taken into consideration. First of all, you don't know how long it will take, and how far prices will rise, before the bubble will burst. Secondly, you don't know how fundamental values will change during the period of the period between now and the burst.

The market is highly non-linear, and when prices are close to fundamental values, there is almost no tendency for "reversion to the mean", whereas when prices strongly diverge, the tendency for mean reversion grows.

Now my question is (especially to Cindy), how do you trade?
The nail that sticks out gets hammered back in
  • #28
  • Feb 26, 2011 5:48am Feb 26, 2011 5:48am
Quoting kingsurfer
Cindy,
Thank You for weighing into this discussion. I noticed you seem to agree with one of my untested theorems. Please, What is your opinion about these theories I am basing my strategy on...

1. The trend is stongest at the begining and weakest at the end, therefore

2. Averaging in gives worse price while averaging down gives better price.Therefore

3. Averaging down methodology, for a newbie, in the long run will perform better than chasing the trend strategy.

I respect your opinion. But ofcourse, I take personal responsibility.

King....
Hey KS

hm I will try an offer an opinion... I like you're thinking but what if your analysis is wrong? At some point you have to stop averaging down unless you want to blow an account. You are still chasing a trend averaging down, that is the reason you're averaging down isn't it?

I think whatever way you choose in a sense by averaging you are essentially being more risk averse, but you could do this without averaging by simply opening up a position that doesn't average and re opening a position if it hits your stop if you think its a good place to re enter.

Keep in mind I have never used averaging so I'm no expert on the subject. All I was saying is that you can still average without actually averaging if that makes sense!
Time hides Nothing
  • #29
  • Feb 26, 2011 5:58am Feb 26, 2011 5:58am
Quoting CindyXXXX
Hey KS

hm I will try an offer an opinion... I like you're thinking but what if your analysis is wrong? At some point you have to stop averaging down unless you want to blow an account... you can still average without actually averaging if that makes sense!

Very Lucid. Somehow I have to incorporate this into my theories. Will work on it.
Thank You.

King.
  • #30
  • Feb 26, 2011 6:04am Feb 26, 2011 6:04am
Quoting Noloqy
Consider this: a bubble is developing as prices...
Sell high and hedge it by selling its negatively correlated partner.

Without the hedge sell high and set your risk parameters. If your SL is taken out and your analysis is right it is now surely very high... Sell again.

Or you could average down where by you're selling when you think its high... it goes against you so you sell again (remind you of anything?)

EDIT: there's no predictive power in averaging you're either gonna be right or wrong if you average this outcome then you will be less right or less wrong, if the purpose of this was to reduce your risk then why not trade a reduced risk position in the first place? I hope someone tares my logic to pieces somehow because I would like to learn something about this. Nology can I ask you how you would trade that situation?
Time hides Nothing
  • #31
  • Feb 26, 2011 6:31am Feb 26, 2011 6:31am
Quoting clc4x
Have a provision in your money management plan that says, “Don’t average down.” Averaging down means adding to a losing position, and you shouldn’t do it. This is one of the cardinal sins of trading. If you are losing, there is a good reason for it: The trade is no good. If it were any good, you’d be making money on it, not losing. There is no surer way of getting hurt badly than to start adding to a bad position.
If you factor in reversals then you are doing the wrong thing adding to winning position because a small reversal quickly puts you into a loss. On the other hand if a reversal occurs while you are averaging down( the reason you are still in the trade), you are quickly in profit because your average position is much better.

I see a lot of comments saying 'when the position goes against me I know I'm am wrong' ! So when the trade heads in your direction that means you are right? Have your TP ever been missed by a few pips? What of your SL?

The problem is the basis of your 1st trade may still be there (even stronger) when your SL is hit. Are U going to stop following your signal? Alternatively, does one loss in a row signify you dump the system for that day?

I learn both from people who see things differently as well as those who see it my way so feel free to reply. Even those who don't see it in these terms are welcome.

King
  • #32
  • Feb 26, 2011 6:36am Feb 26, 2011 6:36am
Quoting CindyXXXX
Interesting statement Troikaone would you mind giving a quick example in terms of a real trade on exactly what you're talking about and how you would do this.?


One more thing... Whats the difference between closing an ("all in") losing position and opening a new one in the same direction if you think its still the right way to trade, and averaging down?

Also whats the difference between closing an "all in" position in profit and then opening a new one, and averaging in...

With the above in mind... What the difference between someone...
But the outcome of the spread is equal regardless. If I open a position of 2% twice I still pay the same cost of spread (provided the spread value is the same) as I do on 4% once.

Also you dont average into a position with the same value. If I open position 1 with 4% and the market moves x pips into my favour, I am not going to open position 2 with 4% also, Unless position 1 has either full protection at BE or has had some position value reduced through profit taking. Even still I would not be comfortable with a 4% increase but would be happier with a 2% and then if I open a 3rd a 1%. By the time my 3rd position is open, position 1 would be protected by SL values at the point of position 2 which would also have protection of SL values at BE, therefore in the worst case scenario I have lost 1% which would be the cost of the last trade alongside some spread costs if I havent factored them into protection.

Averaging down however is usually done the opposite way, with desperation to minimise the average position and to bridge the gap between that position and current market.

Depending on where and how often you open those positions to help counter the overall loosing position will determine how near or far from the current market and the total margin tied in. The end result for averaging down is usually the lower payoff with the trader just glad to be up and positions are liquidated without any real gains. On the other hand, trader 2 who averages up can easily find themselves with later positions that they can liquidate to add capital whilst the main position is now 100's of pips away with SL values moving up. This trader will benefit far better that trader 1 who is just thankful that those latter positions now allow them to liquated the loosing positions from earlier on.

RT
  • #33
  • Feb 26, 2011 6:53am Feb 26, 2011 6:53am
Quoting Razor_trader
But the outcome of the spread is equal regardless. RT If I open a position of 2% twice I still pay the same cost of spread (provided the spread value is the same) as I do on 4% once. RT
Exactly but in that example you're price is worse by averaging than all of it at once

Quoting Razor_trader
Also you dont average into a position with the same value. If I open...
Thanks RT but I wasn't saying 4% twice i was saying that is the overall risk is 4% and is 4% is proportionately scaled in.
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  • #34
  • Feb 26, 2011 6:55am Feb 26, 2011 6:55am
Quoting CindyXXXX
Sell high and hedge it by selling its negatively correlated partner.

Without the hedge sell high and set your risk parameters. If your SL is taken out and your analysis is right it is now surely very high... Sell again.

Or you could average down where by you're selling when you think its high... it goes against you so you sell again (remind you of anything?)

EDIT: there's no predictive power in averaging you're either gonna be right or wrong if you average this outcome then you will be less right or less wrong, if the purpose of this was...
How can you be so sure that your analysis is right? I watch threads like the AUD/USD and/or the EUR/USD. There is so much conflict of where the markets are going that it is the simpliest place to understand why the markets fluctuate. If your wrong, then your wrong get out. Hedging, no need to discuss here because the pro's and con's are elsewhere but if your sure that by being long 1 market will help to maintain the short in another market then why not back that theory, close the short and gain from the long...

It takes a very very long fundamental outlook along with a very strong account position to be able to gain from averaging down. However in the event of a major market fix, the Black Swan event, is it really worth blowing the account.

I will give you 1 real life example of a gentleman who made over a million trading this way. He started with relatively little and during a sustained bull run he made fantastic gains by being bullish, regardless. He would take positions, let them mature and take profits. In the event of a sustained pullback he never relented and he averaged down his position. It worked a treat. The market came back, broke the highs, rallied somemore and he counted the cash. He threw it all away during a longer, stronger than expected bear rally that he traded the same way as he had before but this time the margin ran out and he went bust. That took less than 2 weeks (memory is rusty but it was very short) with the bulk of the damage happening in the first 3-4 days. His commitment was the same as the times in the past, the prices he got where in most cases the same or better and all the risk factors mirrored previous behaviour but he went bust in a spectacular manner.

The question is: Is it worth all the time and effort if you cannot protect your capital from an event as detrimental as this.

At the least in the average up scenario you have some profit taking measures, you have protection against the Black Swan by having the SL measures in place... I know where I would rather invest my efforts...

RT
  • #35
  • Feb 26, 2011 7:06am Feb 26, 2011 7:06am
I simply do not like taking a loss at the worst price. I always try for a retracement esp. if my signals are still strong.

If signals for the second trade validates while the first is still open then averaging down becomes inevitable. It would have been far easier if I could close every one before the next starts.

When it reaches the 3rd trade in a row... this is where I don't have a satisfactory answer as it soon begins to look like a Martingale . Still researching what to do here! All opinions, advice, lead, etc, welcome.

King.
  • #36
  • Feb 26, 2011 7:07am Feb 26, 2011 7:07am
Quoting CindyXXXX
Thanks RT but I wasn't saying 4% twice i was saying that is the overall risk is 4% and is 4% is proportionately scaled in.
I was going off this

Answer: The guy averaging in pays the spread TWICE and gets a worse average price...

The spread costs are the same regardless as I mentioned and the averaging in guy gets a worse average price, how can that be. The average in guys worst average price is positive as opposed to the average down guy who overall position is negative.

Factor in the emotion aspects of relief. If your opening position is down 500 pips and you have subsequent positions of -300, -100 and then you finally get a couple of positions that average out the loss are you going to close the winning positions and hold the loosers still or are you going to liquidate the enter process.

For example lets take:

P1 : -500
P2 : -250
P3 : -50
P4 : + 300
P5 : +520

Net Position +20

Are you going to liquidate P4 and P5. Are you going to liquidate all P's because techically it is now trending opposite to expectation. Are you going to hold all positions looking for continued momentum which would now allow more positive growth.

It would be interesting to see the thoughts on this. Hindsight is 20/20 therefore it is always easiest to say what should have been down. You could liquidate P4/P5 and have the market swing wildly against you. That wouldnt be as harsh given your lighter 2 positions which have added to your capital base (not including floating P/L). You could liquidate and have the market move wildly in your favour meaning step 3 would have been best and so on.

I would still overall prefer the comfort of a worst + ave pip position than the hope that my better - pip position will return to favourable ground. Capital preservation and equity growth are my keys to longevity in this game, not the gamble that my analysis and belief in the trend will play out in my favour.
  • #37
  • Feb 26, 2011 7:15am Feb 26, 2011 7:15am
Quoting kingsurfer
I simply do not like taking a loss at the worst price. I always try for a retracement esp. if my signals are still strong.

If signals for the second trade validates while the first is still open then averaging down becomes inevitable. It would have been far easier if I could close every one before the next starts.

When it reaches the 3rd trade in a row... this is where I don't have a satisfactory answer as it soon begins to look like a Martingale . Still researching what to do here! All opinions, advice, lead, etc, welcome.

King.
Whats wrong with taking the medicine on the first one, closing out and re-evaluating. If the market moves lower and you get a new signal then would it not be best to then open a new position.

If this position moves against you then you know your still wrong and you can exit.

If you fail to exit position 1 at a 2% loss (example figures) and the market moves against you another 2% where you open a new position then you effectively commit the first position to a larger task. Then as per your thought process you move another 2% lower, P1 is now down 4-6%, P2 is down say 2% and your still not willing to admit your wrong. What could have been a 4% loss is compounded with subsequent failed positions. The drawdown on your account is now mounting and your whole focus changes.

It may not seem this way on a demo, but you trade live, an amount that holds significant emotional attachment and you will find your limit. You will find yourself and how you cope with your decisions.

In the end this may work for some. Some might be able to find long term success with this but to do so you need to be able to commit small enough positions so as to not margin yourself during an 'unexpected' reversal that runs deeper than you foresaw.

Interesting discussion for a late Saturday nite.

Take care

RT
  • #38
  • Feb 26, 2011 7:25am Feb 26, 2011 7:25am
Quoting Razor_trader

For example lets take:

P1 : -500
P2 : -250
P3 : -50
P4 : +300
P5 : +520

Net Position +20
Or what about:


P1 : -500 SL hit -500
P2 : -250 SL hit -250
P3 : -50 SL hit -40
P4 : +300 TP hit +300
P5 : +520 TP hit + 520

Net Position +20 (ignoring spread)

Same thing! That's my only point

Cheers
Time hides Nothing
  • #39
  • Feb 26, 2011 7:34am Feb 26, 2011 7:34am
Quoting CindyXXXX
Interesting statement Troikaone would you mind giving a quick example in...
The best example I can offer in terms of properly averaging down is the deviation from an area of support/resistance. As I mentioned before, you have to know when to do this because you could be in the midst of a major breakout and not know it if you don't know what you are doing.

As far as your statement about the difference between going "all in" and closing/reopening a new position......I prefer to give myself a whole lot of wiggle room just in case I miss something in my analysis. If I go all in, my stop will be hit a lot quicker.....but if I average in...I give myself more time to assess the situation. Again, this has to be done intelligently and it requires a whole lot of patience. If you decide to just average in w/o a "proven" gameplan, you will get so crushed that you will never have the courage to do it again.
  • #40
  • Feb 26, 2011 7:46am Feb 26, 2011 7:46am
Quoting Razor_trader
I was going off this

Answer: The guy averaging in pays the spread TWICE and gets a worse average price...

The spread costs are the same regardless as I mentioned and the averaging in guy gets a worse average price, how can that be. The average in guys worst average price is positive as opposed to the average down guy who overall position is negative.
I was comparing the price of someone who goes all in at 4% risk and a guy who averages in at 2% each time... The guy at 4% gets the best price with 4% risk. The guy that averaged in still has 4% risk after the second position but his average price is much worse, so in all the attempts to manage the risk through averaging the overall profit will be smaller and the loss potentially larger... Is it worth it? Does the risk aversion out weigh the lost profits of getting a worse price? If he is prepared to have 4% at risk on that position why do it in halves why not get the best price?

I know someone will say the second position is protected by the fact that he first positions SL is probably now at break even but again I say to this that you now have a twice as likely chance of getting stopped at BE and is this worth the risk aversion process in the first place?

No one has converted me yet I will still be happily going all in at my 2% risk on Monday. = )
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