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is Averaging Down Profitable?

  • #21
  • Mar 5, 2011 1:00am Mar 5, 2011 1:00am
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...
My opinion is that what you’re proposing violates number of principles of successful trading. It is possible that you have introduced some kind of “post-dictive-error” into your backtesting, plus the logic behind such strategy doesn’t make sense. All traders want their trades to go in their direction, and if the trade goes against them it means they’re wrong, and they get out to cut their losses.

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 .
  • #22
  • Mar 5, 2011 3:41am Mar 5, 2011 3:41am
Hi Folks !

For me averaging down works !

The important thing is to average down at extreme turning points !!

I have built my own trading system and to be honest it takes a lot of
hard work and experience to become consistent in trading !!

It took me 6 years and I'm still learning.....

I've builded up a practice account from 50.000 to over 250.000 USD
during the time period 06/2010 - 02/2011 using this method.

Since 01/2011 I'm live with a portion of my funds.

I'm in contact with some banks in London whom I send my statement
to prove it again with a practice account given by a private bank.

Happy trading

Bernhard
  • #23
  • Mar 5, 2011 4:29am Mar 5, 2011 4:29am
Quoting behof
Hi Folks !

For me averaging down works !

The important thing is to average down at extreme turning points !!

I have built my own trading system and to be honest it takes a lot of
hard work and experience to become consistent in trading !!

It took me 6 years and I'm still learning.....

I've builded up a practice account from 50.000 to over 250.000 USD
during the time period 06/2010 - 02/2011 using this method.

Since 01/2011 I'm live with a portion of my funds.

I'm in contact with some banks in London whom I send my statement
to prove it again...
Please can you share with us the "Sharpe Ratio” of your profits?
  • #24
  • Mar 5, 2011 7:38am Mar 5, 2011 7:38am
Quoting behof
Hi Folks !

For me averaging down works !

The important thing is to average down at extreme turning points !!

I have built my own trading system and to be honest it takes a lot of
hard work and experience to become consistent in trading !!

It took me 6 years and I'm still learning.....

I've builded up a practice account from 50.000 to over 250.000 USD
during the time period 06/2010 - 02/2011 using this method.

Since 01/2011 I'm live with a portion of my funds.

I'm in contact with some banks in London whom I send my statement
to prove it again...
well, practice accounts don't mean much. They don't take into account slippage, fast markets, (maybe manipulation by the broker) and so on. Do it with a real account and you will have a much more convincing argument for the banks in london.
  • #25
  • Mar 5, 2011 7:47am Mar 5, 2011 7:47am
It's used for when you know the direction, but not the turning point. I spent months trying to implement a mechanical way of doing it but honestly, i'm not good enough to do this sort of thing.

The best trader i know made his money from it, losses are kept to a maximum.

The good thing is, which people don't seem to understand, is that those 'small wins' that occur when your profit target is hit without scaling in much is money you wouldn't have otherwise made by waiting for a deeper pullback.

But whatever, some seriously good traders do it,some don't, i don't and i can't see how it would benefit me in any way for now.
  • #26
  • Edited Mar 6, 2011 4:29pm Mar 5, 2011 9:13pm | Edited Mar 6, 2011 4:29pm
Can't believe this debate hasn't produced any thing of educational value yet. Just both sides jousting. A few things should be clear.

Firstly, its a sure way to fall off a cliff if you are not a skilled trader and decide to add to a loser. This point should not be discussed because its fact and does't help any skilled traders grow. That is the intention of all this for traders to grow. So this principle is only relevant to skilled traders who need robust tools in their toolbox.

The term average down or scaling in is not so good and has a lot of conuation connected to it. A better term is multiple entries for one total position with a defined risk.

Here are two quotes that are a paradox to what most say around here on these forums. Think carefully about them with all your trading experience you have acquired over the years. And you will see the answer why one must "average down". At first it appears on first read not to work a position from below. But that is the immature assessment that I'm certain of.

"I've learned many things from him, but perhaps the most significant is that it's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong."


"If trading is entertaining, if you're having fun, you're probably not making any money. Good trading is boring."
  • #27
  • Mar 5, 2011 9:16pm Mar 5, 2011 9:16pm
Quoting Herd_master
If you’re scaling in as the trade goes against you, then obviously you have not very reliable entry techniques (signals)..

Springs or Shakeouts (covered in detail in later lessons) usually occur late within the trading range and allow the market and its dominant players to make a definitive test of available supply before a markup campaign will unfold. If the amount of supply that surfaces on a break of support is very light (low volume), it will be an indication that the way is clear for a sustained advance. Heavy supply here will usually mean a renewed decline. Moderate volume here may mean more testing of support and a time to proceed with caution. The spring or shakeout also serves the purpose of providing dominant interests with additional supply from weak holders at low prices
  • #28
  • Mar 5, 2011 11:47pm Mar 5, 2011 11:47pm
^
That’s why top/bottom picking should be approached preferably only with options, for example with puts if IV is cheap when trying to pick top, or say with call ratio backspreads if trying to pick bottom. As the saying goes, “There are old traders and bold traders, but there are no old, bold traders”.
  • #29
  • Mar 6, 2011 1:02am Mar 6, 2011 1:02am
For me averaging down works, but I call it "scaling into a position" at the moment.
Money management is the key and if you have that under control then it works. ALWAYS

Shamu
New voice message: Why are you calling me? If I need you, I'll call you!
  • #30
  • Mar 6, 2011 4:23pm Mar 6, 2011 4:23pm
Quoting KillerWhale
For me averaging down works, but I call it "scaling into a position" at the moment.
Money management is the key and if you have that under control then it works. ALWAYS

Shamu
Scaling in is different from averaging down.

Scaling in = adding to winning position.
Average down = adding to losing position...aka dollar-cost averaging.
  • #31
  • Edited 8:29pm Mar 6, 2011 4:41pm | Edited 8:29pm
Quoting Herd_master
^
That’s why top/bottom picking should be approached preferably only with options, for example with puts if IV is cheap when trying to pick top, or say with call ratio backspreads if trying to pick bottom. As the saying goes, “There are old traders and bold traders, but there are no old, bold traders”.
Dear Sir:

Your understanding of options should be the very reason why one should work a position from below.

For example a big swinging di$k (Goldman and the like) is definitely involved in the options market for the foreign exchange market. That is where the printing press exists.

Anyhow that is why you will see spot move in a adverse manner to a well planned entry. Because the option is still overpriced and they want to be long or short but wont pay the premium. So they hit the spot market fast and furious. And that is where value is created and I will fly my colors with "strength and honor" when all the rest are "puking". HOO-RAH!!! That is the mark of a trader smell blood and attack, attack and attack. You fight like you have a pair you don't run like a puss
  • #32
  • Mar 6, 2011 7:48pm Mar 6, 2011 7:48pm
Quoting katongogo
But first, in order for average down to be successful, your initial direction must be correct to begin with
You can average down to a certain point, then you would have to cut your loses. I mean its easier to see if your wrong if price action moves 100pips against you, than let say less than 30...
  • #33
  • Mar 6, 2011 9:57pm Mar 6, 2011 9:57pm
Quoting Guerrillawar
That is the mark of a trader smell blood and attack, attack and attack. You fight like you have a pair you don't run like a puss
My trading is all about defense, defense, and defense, I have no need prove to myself that I’m a hero.
  • #34
  • Mar 6, 2011 11:31pm Mar 6, 2011 11:31pm
Quoting Herd_master
My trading is all about defense, defense, and defense, I have no need prove to myself that I’m a hero.
who says averaging down is not part of a defense strategy.
as long as one comes prepped and not let emotions take control any method can make money.

trading requires a strong mindset. theres no such thing as a perfect plan or a perfect system.
  • #35
  • Edited Mar 7, 2011 3:05am Mar 6, 2011 11:41pm | Edited Mar 7, 2011 3:05am
so, The trade isn't a loser until it reaches stoploss,
that's why, if you still beleive in the trade you can add some money on it.

i think the trader must test it in backtest
to find out what is the expectancy
for the trades that moved against you at the beginning of trade.(but did not reach stoploss)
make the statistics on:
1. trades that were on 20% the distance between entry point and stoploss.
2. trades that were on 40% the distance between entry point and stoploss.
3. trades that were on 60% the distance between entry point and stoploss.
4. trades that were on 80% the distance between entry point and stoploss.

----tp
----
----
----
----entryPoint for long trade
----20%
----40%
----60%
----80%
----stoploss

if the answer for instance is positive expectancy on trades that were on 20% the distance between entry point and stoploss.
then it is profitable to average down in that level (20%)
  • #36
  • Mar 6, 2011 11:48pm Mar 6, 2011 11:48pm
Quoting lolik2020
i think the trader must test it in backtest
to find out what is the expectancy
for the trades that moved against you at the beginning of trade.
make the statistics on:
1. trades that were on 20% the distance between entry point and stoploss.
2. trades that were on 40% the distance between entry point and stoploss.
3. trades that were on 60% the distance between entry point and stoploss.
4. trades that were on 80% the distance between entry point and stoploss.

----tp
----
----
----
----entryPoint for long trade
----20%
----40%
----60%
----80%
----stoploss...
I have never done any back testing, takes way too much useless time.

I call my averaging down now "scaling into a position".
Lol it is exactly the same but it sounds better and wiser.
I'll go down 100's of pips if I have to but I will come out as a winner.

Shamu
New voice message: Why are you calling me? If I need you, I'll call you!
  • #37
  • Mar 6, 2011 11:49pm Mar 6, 2011 11:49pm
Quoting Herd_master
My opinion is that what you’re proposing violates number of principles of successful trading....
Very good points, Herd_master.
The first thing I would respond to the original question, is that it almost implies a failure to have a trading plan (add a violation of "plan your trade etc."). Averaging down in and of itself is not inherently wrong IMHO. But for me, it is like asking if buying EUR/USD is wrong. What exactly is the context? If you have a good trading system/strategy, and as part of the money management for this system you average down, I don't see too many problems there (although, a robust plan would probably call for more sophisticated entries than your typical averaging down).
But if you're asking if averaging down is good or bad for a sporadic trade, than (again, IMHO) it is not only the averaging down that is wrong: it is the whole concept of almost randomly investing your money without a plan. Irresponsible, dangerous, and unsustainable.
  • #38
  • Mar 6, 2011 11:55pm Mar 6, 2011 11:55pm
Quoting lolik2020
Don't forget to vote ^ above ^ :-)
I can't vote sorry because I don't use stops, so no answer would apply to me.
But I do scale into a position. Even far down.
Doesn't that sound much better than averaging down?
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  • #39
  • Mar 7, 2011 12:16am Mar 7, 2011 12:16am
Quoting KillerWhale
I can't vote sorry because I don't use stops, so no answer would apply to me.
But I do scale into a position. Even far down.
Doesn't that sound much better than averaging down?
Lol I will post my current Oanda trading chart, and an MT4 daily chart of UY.
Then I can challenge anyone who says that averaging down (or scaling into a position which is the same in my eyes) is per se a bad thing. Study the charts and you'll know what I mean.

Shamu

Any comment is welcome, I'm not trying to offend anyone.
Happy trading for all.
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  • #40
  • Mar 7, 2011 12:57am Mar 7, 2011 12:57am
Quoting KillerWhale
Lol I will post my current Oanda trading chart, and an MT4 daily chart of UY.
Then I can challenge anyone who says that averaging down (or scaling into a position which is the same in my eyes) is per se a bad thing. Study the charts and you'll know what I mean.

Shamu

Any comment is welcome, I'm not trying to offend anyone.
Happy trading for all.
I could show that entering randomly and setting SL ten times as far as TP is a good system: for a limited number of trades, I have no losers and positive "expectancy" (quotes imply lack of statistical significance). Similarly with averaging down, a trader may have many successes, but it could eventually nuke their account.

More generally, each entry should have a valid reason and a plan. IMHO, averaging down counts as neither.
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