DislikedHi,
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...Ignored
If you’re scaling in as the trade goes against you, then obviously you have not very reliable entry techniques (signals). The only logic that I can see in your method is as the trade goes against you, is that as volatility reverts to the mean, you can potentially get cheaper average price as you’re being filled at the edges of a bell curve. I do occasionally trade from extended zones to take advantage of STDV, but it should be taken advantage of only through high probability entry and not as a compensation through adding to losers to average the price of the losers.
Also the fallacy with this approach is that it not only let’s your losers run, but if you’re right on the trade, then you end up with only 20% of your size and you get only a fraction of the profits. Your proposed position sizing undoubtedly improves the results of those traders who have very low Win to Loss ratios.
Another flaw in this position sizing (money management) approach is that it caters for people’s "need to be right", it makes traders to be risky and conservative at the wrong times. This is why some people like this idea, yet all these are the same reasons why people usually fail in the markets. Also people like to give overwhelming importance to making the current trade to be a winner, therefore I'm sure that such method will feed on people's biases and therefore they'll defend such method as it gives them emotional comfort.
It's not how professionals make their living, but if it works for you, then good luck with it .
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