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Averaging Down

  • #41
  • Feb 26, 2011 8:04am Feb 26, 2011 8:04am
Quoting Razor_trader

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


RT
Yes.....trading this way is extremely risky and not for those who rely on 30 pip stop losses. Your float in your account will be very negative at times. The whole trick is to know when to apply this method and having the right mindset when you do it. You cannot let your ego get in the way and let that one bad trade completely cripple you. I accept that every blue moon, I will have a bad trade...that's trading. Also, when I am averaging in......I do not view it as adding to a losing position.....I look at it as an opportunity to "add" to my position. But you have to have the upmost respect for the markets when you do this and know when to take profits.
  • #42
  • Feb 26, 2011 8:10am Feb 26, 2011 8:10am
Quoting Troikaone1
Yes.....trading this way is extremely risky and not for those who rely on 30 pip stop losses....
Ok then... I've found another flaw in your plan,,, What happens when you're right and you know it and you are holding a couple of losing positions and you can no longer open another position due to leverage restraints... You're position is fked and so is your logic.

Also you will have to decide before you trade how many trades you are going to allow yourself to be able to open and adjust your position size for the worst possible scenario...

Sorry but this whole average thing is just bollox I know a lot of people disagree but it is... By holding winners or losers you are limiting your options because you are using up your leverage by allowing for situations that you dont even know have happened yet

BTW - sorry about the F bomb, no offense intended, it just sounded better lol
Time hides Nothing
  • #43
  • Feb 26, 2011 8:16am Feb 26, 2011 8:16am
Quoting CindyXXXX
Ok then... I've found another flaw in your plan,,, What happens when you're right and you know it and you are holding a couple of losing positions and you can no longer open another position due to leverage restraints... You're position is fked and so is your logic.

Also you will have to decide before you trade how many trades you are going to allow yourself to be able to open and adjust your position size for the worst possible scenario...

Sorry but this whole average thing is just bollox I know a lot of people disagree but it is... By holding...
Hey Cindy,

It is definitely not my intent to convince you to trade the way I trade...I obviously don't have anything to gain. FF is just a place to share ideas and perspectives.
  • #44
  • Feb 26, 2011 8:18am Feb 26, 2011 8:18am
Quoting Troikaone1
Hey Cindy,

It is definitely not my intent to convince you to trade the way I trade...I obviously don't have anything to gain. FF is just a place to share ideas and perspectives.
Does that mean I win?

This poor dead horse is getting a good kicking isn't it
Time hides Nothing
  • #45
  • Feb 26, 2011 8:19am Feb 26, 2011 8:19am
Quoting CindyXXXX
Does that mean I win?

This poor dead horse is getting a good kicking isn't it
Yep.....you win!!!
  • #46
  • Feb 26, 2011 8:21am Feb 26, 2011 8:21am
Quoting Troikaone1
Yep.....you win!!!
I guess I just don't get it. Its been interesting though thank you
Time hides Nothing
  • #47
  • Feb 26, 2011 8:27am Feb 26, 2011 8:27am
Forex Factory is an excellent place to pick up a nugget of wisdom here and there. You may not find the ultimate solution to all of your trading woes....but you may pick up a spark somewhere that can take your trading to the next level. You never know!!
  • #48
  • Feb 26, 2011 8:29am Feb 26, 2011 8:29am
Quoting Troikaone1
Forex Factory is an excellent place to pick up a nugget of wisdom here and there. You may not find the ultimate solution to all of your trading woes....but you may pick up a spark somewhere that can take your trading to the next level. You never know!!
Something for me to think about anyway but I can't say I found any nuggets here. Maybe something will click later on but I doubt it. We'll just have to agree to disagree and I will continue making nice profits without averaging.
Time hides Nothing
  • #49
  • Feb 26, 2011 8:31am Feb 26, 2011 8:31am
Quoting CindyXXXX
Something for me to think about anyway but I can't say I found any nuggets here. Maybe something will click later on but I doubt it. We'll just have to agree to disagree and I will continue making nice profits without averaging.
OK
  • #50
  • Feb 26, 2011 9:18am Feb 26, 2011 9:18am
Quoting CindyXXXX
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...
The problem most have with averaging into a position is in their static thinking, i.e. adding at predetermined levels. This is more akin to grid trading, which I believe there’s a thread here at FF covering the topic. Adding to a position should be determined by price action. If price is screaming south, why would I go long at any level, without some type of sign that price was bottoming?

Obviously, entering all in at the perfect spot and exiting 100% at target - offers the greatest profit. However I’m not so smart most of the time to pick the perfect spot, “averaging in and out” deals with risk management. Which inmo is the cornerstone of trading.

Everyone has to work out for themselves their own “entrance parameters” which will be a reflection and mixture of their individual account size, risk tolerance and style of trading. No two will be exactly the same. Personally, I divide my overall position into several entries, which are based on a fib progression, each progressively weighted higher. What I manage is the risk of my “position average” in relation to the current price and “in context with current price action”. This can be used with or preferably without stops (although there needs to be a catastrophic limit in place), both have their own pro’s and cons and their own basic mathematics of trading.

The markets are dynamic, no two trades unfold in exactly the same way. Discretionary averaging allows you the ability to be flexible with price action.



Fwiw,
  • #51
  • Feb 26, 2011 9:24am Feb 26, 2011 9:24am
Mathematically, your optimum position at any time can be calculated based on how much capital you have and how much information you have about future prices. Logically, your existing position should have no bearing on your decisions.

So, to put it simply, in order to justify doubling your position you need to be either twice as rich or twice as certain about the future.
  • #52
  • Feb 26, 2011 9:38am Feb 26, 2011 9:38am
The markets are extremely old and extremely wise. It knows where all of the optimum entries are and it knows that you have about a 40 to 50 pip stop because that is what you have been taught. These 40 to 50 pip spikes (sometimes higher) are either breakout scenarios that can kill you or they are stop runs....only experience can tell the difference. The first time I saw a 60 pip spike it scared the living crap out of me. After seeing this "scenario" play out hundreds of times over the years, it is no longer an anomaly to me.....it is considered normal and I use those types of events to average into my position.

I am over the notion of winning 100% of the time......as I have said previously.....there will be an instance where averaging in seemingly won't work........personally I don't care anymore........you win.....you lose........that's trading.
  • #53
  • Feb 26, 2011 9:48am Feb 26, 2011 9:48am
Quoting Troikaone1
The markets are extremely old and extremely wise....
Depending on the current market field, yes, stop sweeps happen all the time, fading them can advantageous. On the opposite end they can be good opportunities to take partials and reload on the pull back.
  • #54
  • Feb 26, 2011 10:07am Feb 26, 2011 10:07am
Quoting auxesis
Depending on the current market field, yes, stop sweeps happen all the time, fading them can advantageous. On the opposite end they can be good opportunities to take partials and reload on the pull back.
Correct. Some stop runs occur w/in 20 minutes and some take 20 hours to complete themselves.....it just depends on market conditions.
  • #55
  • Feb 26, 2011 11:04am Feb 26, 2011 11:04am
Quoting wallstrtmn
For a long time I took the advice to not average down and to use stop losses to stop a losing trade....
+1
  • #56
  • Edited 5:16pm Feb 26, 2011 5:07pm | Edited 5:16pm
Quoting CindyXXXX
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
I should have been more clear, SLs would not be those figures but instead something like 100-200 pips. This was very quick, not really well thought out but an example. The figures are skewed but could potentially mirror dips that you would rebuy at to average down. The point had nothing to do with SL's in this example because I personally wouldnt have a SL as large as 500 pips...

BTW the ave in or down is a long term investment strategy. I prefer to call my shots when I see the opportunity and manage that trade. Once the trade has delivered some form of profit and SL is at BE then I look at the next opportunity and trade it in the same manner. I have tried both ave in and down over the time I have traded and I dont seem to like either except if I am trading Daily which then in my mind it is just new trades on new days but technically could be considered ave up. I dont trade without a SL, I have had my times where the lesson of closing a painful lose because I was wrong could have been helped had I encorporated a SL. I am no where near smart enough to understand all the ins and out to price movement but thats not my job. My job is to protect my capital and not put it in more risk than I need to handle, straight and simple. As you said we will just agree to disagree because no 2 people trade identically and no 2 people share the same tolerances to risk.

Take care

RT
  • #57
  • Feb 26, 2011 5:41pm Feb 26, 2011 5:41pm
Quoting CindyXXXX
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...
I wouldnt be averaging in at equal terms. If my total risk exposure was to be a maximum of 5% then my first order would be for 3%, second for 1.5% and third for .5% or something along those lines. That way if I am wrong from the outset then my damage will be 3%. I cannot consider the long term effects of this kind of entry because it doesnt interest me, my point was that if I had to choose between the 2 then I would prefer to average up rather than down because you will live longer, have more equity for future trades because the trades you have in play will have positive or neutral (or in the case of the first position a possible small negative) effect on your margin as opposed to equity tied up with negative position/s.

I have run simulations for the average down and I can say that apart from 1 time, where my risk was very small (less than 1%) the end result was a massive failure (blown account) or a massive loss because positions were just too far from the current market. Drawdowns are massive and the end product is would you hold the same trades as winners for 1000's of pips or would you take profit well before then. If your taking profits at significantly less pips then your prepared to risk then this case you will have a negative risk/reward which effectively requires a high win rate for positive expectancy which all in all means absolutely nothing if your nursing a blow account...

RT
  • #58
  • Feb 26, 2011 6:09pm Feb 26, 2011 6:09pm
Quoting kingsurfer
It's possible the career would have been killed more than twice if you did not use averaging down.

If you are now more succesful it could be that you are now simply better at trading and not necessarily because you have stopped averaging down.

Personally, I think 'anything' is better than a direct stop loss in forex.

I have paid dearly sometimes, but I still average down. I'm also getting better at it.

King.
I don't know how long you've been trading, but you have to understand that averaging down is a gambling technique, and if you do it you have an inherent gambler's mentality. You may have lucky with it so far, but ultimately you will see gambling style results. All it takes is one losing trade that you absolutely refuse to let go of, to start a chain reaction which will kill your account, or cause enough damage to leave you mentally distraught.
  • #59
  • Feb 26, 2011 6:20pm Feb 26, 2011 6:20pm
Quoting fxpipper
I don't know how long you've been trading, but you have to understand that averaging down is a gambling technique, and if you do it you have an inherent gambler's mentality. You may have lucky with it so far, but ultimately you will see gambling style results. All it takes is one losing trade that you absolutely refuse to let go of, to start a chain reaction which will kill your account, or cause enough damage to leave you mentally distraught.
If you average in w/o a clear and proven strategy, then it is gambling. Averaging in w/ a high probability set up is a perfect marriage IMO.

When you average down, or average in randomly or in the middle of a major breakout just for the sake of doing it.....then you are gambling that somehow it will turn around and go profitable. This is similar to grid trading where you average down using a set range w/ no regard to the big picture. I am not a big fan of grid trading.

I will also say that averaging in is not a technique that I would suggest for newbie traders.......you have to be very, very familiar with what you are seeing in the charts. Newbie traders who have little FX trading experience, may not have a healthy fear of the markets and it is a very real possibility that they can get unraveled when something goes horribly wrong. You can get away with grid trading techniques as it relates to the stock market.......but FX is a little different.
  • #60
  • Feb 26, 2011 6:49pm Feb 26, 2011 6:49pm
Quoting Troikaone1
Averaging in w/ a high probability set up is a perfect marriage IMO.
I agree to a certain degree...but the problem I have is that there is no guarantee that even a high probability set up will payoff. Meanwhile your risk exposure is growing larger and larger. As long as your risk is within acceptable limits as you're adding positions, I guess it's ok...but if you're already losing 5% of your account when you decide to start averaging down, then I don't care how high the probability is, you're gambling.
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