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why is everyone so afraid to average down?

  • #181
  • Jun 15, 2010 10:49pm Jun 15, 2010 10:49pm
Averaging into a trade as part of a pre-determined strategy, and with pre-determined limits is quite acceptable (for me) - I regularly do it when trading divergence between index futures, where the trades that initially go against me are the ones that I make the best return on.

This is quite different to averaging into a trade that is going against you, in an ad-hoc manner in the hope that you will recoup your losses (yes, I've done that too, but thankfully not in a while!)

It is better to be right or wrong with a trade - for most people averaging in on negative initial results just complicates matters and increases the probability of a big loss, but that's not to say it can't be a useful strategy if you know what you are doing.
  • #182
  • Jun 15, 2010 11:09pm Jun 15, 2010 11:09pm
Quoting songbo
I see... Iphone fx trader..lol ?
always on the move loL!
  • #183
  • Jun 16, 2010 9:29am Jun 16, 2010 9:29am
Averaging down is intelligent. If you don't like the price you entered at, it only makes sense to raise the break even point of you can exit at. If i were a deep pockets Institution and i needed to defend a position i would average down.

IMO Institutions who create trend they defend pull backs and trap counter-trend traders. They do it on a much more grand scale.

If im scalping a counter trend move. For Example today.

Attached Image (click to enlarge)
Click to Enlarge Name: today.png Size: 31 KB


I Understood that after the impulsive move up Traders were going to use the next move up to take profit. So the second tap of the high would be a nice place to go short so i went short. I used a market order because My piece of shit broker has a massive spread and wont allow a limit order in the range i wanted. Long story short i got a less than favorable price so as price went against me (up) i continued to increase my position size in anticipation for a quick exit. Price began do slowly drift down and i exited with a break even that was a pip or so higher than what was needed if i only had one position.

Averaging Down is defending your position which is part of the battle of trading Dollars against Dollars. Who ever has the money and the balls to fight will win.
  • #184
  • Mar 2, 2014 9:57pm Mar 2, 2014 9:57pm
Quoting Darkstar
{quote} This is the problem with looking at the market as a math equation.... Mathmatically your cost basis on methods A and B are identical, but on a mean reversion basis, B is a higher risk trade. Take 3 price points: 1.60 - trend high 1.50 - trend pullback / first purchase price 1.40 - second extension of trend pullback / second purchase price On the first buy at 1.50, the mean price is 1.55. So mathmatically you have a built in profit of 0.05. Price moves agaist you to 1.40 and you buy the second lot. The mean price is now 1.50 and your cost...

I buy 1 Lot @ 100.00.

It goes up to 100.50 showing an open +50

I buy a 2nd lot @ 100.50

I now have a [email protected]

So why would I add to my winners? Because the math says so, and that's all I listen to; the math.

Suppose I bought at 100.00 and as I put in the example, I bought another at 100.50, showing an open [email protected].

Suppose you bought at 100.50 also, but didn't have a lead-in lot. You are at [email protected]

Let's compare that:

Me: [email protected]
You: [email protected]

I show an open profit of +50, you show a +-0. I bought the 2nd one at a 25pip discount from you. And while you could look at it as a shittier price, you'd be right; but what were your alternatives? Well, you could have gone [email protected] initially, but you then have doubled your risk, yes your rewards have doubled, but hole-in-the-wallet rate has increased potentially also. Buy splitting up your entries; you test the waters, if you are correct, then you ADD TO YOUR WINNERS, and CUT YOUR LOSERS. The __MATH__ says that's the ONLY way to win.

"Cut your losses and let your winners run" <== mathematically only viable long term method.

If you don't add to your winners, what would you have people do, add to your losers?

Suppose I bought [email protected], and the price dropped to 99.50 and I bought another one (adding to your loser).
I would be [email protected]

Suppose you bought at [email protected].

I am -25 pips as an entry position to you, how is that a good idea? It's not. On my wall, framed is a sign that says "Losers Average Losers".

Attached Image


One of the best piece of advice I've ever gotten.
google:
  • #185
  • Mar 3, 2014 12:17am Mar 3, 2014 12:17am
Quoting twoblink
{quote} I buy 1 Lot @ 100.00. It goes up to 100.50 showing an open +50 I buy a 2nd lot @ 100.50 I now have a [email protected] So why would I add to my winners? Because the math says so, and that's all I listen to; the math. Suppose I bought at 100.00 and as I put in the example, I bought another at 100.50, showing an open [email protected]. Suppose you bought at 100.50 also, but didn't have a lead-in lot. You are at [email protected] Let's compare that: Me: [email protected] You: [email protected] I show an open profit of +50, you show a +-0. I bought the 2nd one at a 25pip discount from...


It's all about minimizing your risk - which this does in a nutshell.
  • #186
  • Mar 3, 2014 1:37am Mar 3, 2014 1:37am
Hi,
I've spent some time looking at this whole averaging down / averaging up concept. The summary conclusions I reached are:

First, any money management technique along these lines cannot in itself create an edge.

Second, averaging down means you will have progressively larger positions as you lose as compared to when you win. This is not good even though you are bringing the breakeven point down.

Third, conversely, averaging up means you have progressively larger positions as you win compared to when you lose. This is much better but you bring the breakeven point up as well so it's easier for the trade to fall into loss

So, averaging down improves the chance of escaping from a losing trade but at the cost of a massive loss if it continues against you. It is a bad idea to get yourself in a position where one trade could cost you your account. I think trading is more about a long succession of trades, all roughly equal in terms of risk so your trading edge can be exploited over time.

Alternatively, averaging up can create a massive win if you have a strong move with only slight retracements - your pyramiding the position means big profits and small retracements means your raised breakeven point is not breached.

Overall, on risk-reward and risk control grounds, I'd say averaging down is a net poor idea whilst averaging up can be a a good idea if you have the nerve and the appropriate market conditions.

Hope that helps

PS I confess I do neither; just take the position, set targets and stops and let it be. I really don't like the idea of averaging down and don't have the nerve to average up.
  • #187
  • Mar 3, 2014 2:44am Mar 3, 2014 2:44am
Quoting twoblink
{quote} I buy 1 Lot @ 100.00. It goes up to 100.50 showing an open +50 I buy a 2nd lot @ 100.50 I now have a [email protected] So why would I add to my winners? Because the math says so, and that's all I listen to; the math. Suppose I bought at 100.00 and as I put in the example, I bought another at 100.50, showing an open [email protected]. Suppose you bought at 100.50 also, but didn't have a lead-in lot. You are at [email protected] Let's compare that: Me: [email protected] You: [email protected] I show an open profit of +50, you show a +-0. I bought the 2nd one at a 25pip discount from...
Hey Two Blink, with all due respect sir, you seem to jump from pips to price to lots when it suits your argument.

You may be 2@ 50 But now there's only 25 pips to your break even price rather than 50 pips with 1 lot (no averaging). That's the kicker in averaging up or down..

If I average down (in your example) I am only 25 pips from break even at 2 lots.... This is all of course assuming equal lot sizes on both positions.

It works both ways.
Howlin' at the Moon on the Roof
  • #188
  • Mar 3, 2014 2:57am Mar 3, 2014 2:57am
Ones things for certain though... No one has unlimited funds so your downside is limited... Your upside however, is not

If you were going to average around your prices and hence add risk to your stops getting hit, adding to winners rather than losers would seem like the best practice with the goal of longevity in mind.

Personally my first entry allows for averaging down or up, but I will only average down once, all the rest is up.. My first position is half the size of all other positions. That's just me.. It's because my system attempts to catch bottoms and tops in a sense and doing this gives me some room for "error" and reprieve.
Howlin' at the Moon on the Roof
  • #189
  • Mar 3, 2014 10:24am Mar 3, 2014 10:24am
Quoting marcmarc
I think trading is more about a long succession of trades, all roughly equal in terms of risk so your trading edge can be exploited over time.
Absolutely.
There's always money in the banana stand.
  • #190
  • Mar 3, 2014 2:32pm Mar 3, 2014 2:32pm
Quoting smikester
{quote} I agree with you but I will only average down with very small position sizes, so that when I am wrong (notice I say when, and not if, because, believe it or not I am sometimes wrong) it doesn't hurt too much. It's satisfying to get in at a top or bottom but much safer to trade off price action at the level we anticipated and miss a few pips, set a proper sl and tp and leave the trade alone.
I also agree, I will also only average down with small position lot/contract sizes. I set the rule for myself: the more trades with small lots, the better. Also: the less probability there is that a pending order gets activated, the better. I strongly believe that as a conservative trader I should miss a lot of trades and only focus on the high probability trades meaning that the high amount of trades I was talking about would be conservative trades. I prefer using stoplosses. The only method I know where stoploss is not necessary is when market price is totally at the top or bottom in the monthly chart. I'd like to hear your opinion about this.
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  • #191
  • Mar 4, 2014 2:49am Mar 4, 2014 2:49am
Look, if you aren't going to listen to the math; then you aren't going to listen to the math, and no amount that I say or do will change your mind.

From where I sit; you all average down, while multi-millionaire traders say it's death. Guess who I'm going to listen to? Yep, THE MATH, because that's who they listen to as well.

http://turtletrader.com/losers-average-losers/ <=== This is you guys.

Quote
If you had Enron in your portfolio and didn’t sell it at $90 or even at $10, don’t feel embarrassed. As Alfred Harrison, a money manager at Alliance Capital Management Holding LP, which owned a ton of Enron, put it, ‘On the surface it had always seemed to be a fairly good growth stock. We bought it all the way down.’

Yeah, BRILLIANT, that's the way to make money, buying it all the way down. The idiot didn't know math, and basically nobody who averages down does either.

LOSERS AVERAGE LOSERS. So I guess we all know who the losers are.

Go download a roulette simulator; and average down on it. Tell me when you've become a millionaire and willing to do it at Las Vegas.

The fool and his average down money are soon parted.......
google:
  • #192
  • Mar 4, 2014 3:14am Mar 4, 2014 3:14am
Quoting twoblink
Look, if you aren't going to listen to the math; then you aren't going to listen to the math, and no amount that I say or do will change your mind. From where I sit; you all average down, while multi-millionaire traders say it's death. Guess who I'm going to listen to? Yep, THE MATH, because that's who they listen to as well. http://turtletrader.com/losers-average-losers/ <=== This is you guys. {quote} Yeah, BRILLIANT, that's the way to make money, buying it all the way down. The idiot didn't know math, and basically nobody who averages...

Im im pretty sure the only thing you listen to is the slurpy sound of your own mouth wrapped around your lil one .. But I refuse to let this bother me.
Howlin' at the Moon on the Roof
  • #193
  • Mar 4, 2014 6:13am Mar 4, 2014 6:13am
Quoting Wolf_Wicked
{quote} Im im pretty sure the only thing you listen to is the slurpy sound of your own mouth wrapped around your lil one .. But I refuse to let this bother me.
I present you with math; I present you with reasoning, I present you with a quotes from a multi-millionaire trader; I present you with idiot traders who average down; and you reply I'm sure without reading anything, and with a petty ad hominem.

I hope you do nothing but average down and lose your shirt since you love it so much. You are correct, I am scared of average down, unlike you; so go ahead, average down all you want, but please don't ask why you lose money when you do.
google:
  • #194
  • Mar 4, 2014 6:21am Mar 4, 2014 6:21am
Quoting twoblink
{quote} I present you with math; I present you with reasoning, I present you with a quotes from a multi-millionaire trader; I present you with idiot traders who average down; and you reply I'm sure without reading anything, and with a petty ad hominem. I hope you do nothing but average down and lose your shirt since you love it so much. You are correct, I am scared of average down, unlike you; so go ahead, average down all you want, but please don't ask why you lose money when you do.
Oh man... re read and read again.. without blinking.. maybe change the specks..
Howlin' at the Moon on the Roof
  • #195
  • Edited Mar 9, 2014 9:16am Mar 8, 2014 3:08pm | Edited Mar 9, 2014 9:16am
Quoting Wolf_Wicked
{quote} Oh man... re read and read again.. without blinking.. maybe change the specks..
I'm also re-reading. I'm not blinking in a spike like yesterday. I was howling at the white shining moon on the roof of happyness. Because USD went up. It's now going up long-term.
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  • #196
  • Mar 9, 2014 9:14am Mar 9, 2014 9:14am
never afraid to market but afraid about yoursefl..the world will ending soon...

Better MC rather than profit..because this world control by new world order based on the mother russia
  • #197
  • Mar 9, 2014 2:25pm Mar 9, 2014 2:25pm
Quoting twoblink
"Cut your losses and let your winners run"
I have read this from reputable sources more times than I can count, and I've learned the hard way that it's true. When price moves against me, I figure that I was wrong, and I should preserve my capital by getting out.

One exception that I can think of would be if you were trading a trend/pullback/breakout system, and you were in a winning trade when there was a pullback/breakout that would qualify as a valid entry if you were not already in the pair.

But IMO, true averaging down is wishful thinking, instead of seeing what the charts are actually telling you.
  • #198
  • Mar 11, 2014 9:25am Mar 11, 2014 9:25am
Quoting twoblink
{quote} I buy 1 Lot @ 100.00. It goes up to 100.50 showing an open +50 I buy a 2nd lot @ 100.50 I now have a [email protected] So why would I add to my winners? Because the math says so, and that's all I listen to; the math. Suppose I bought at 100.00 and as I put in the example, I bought another at 100.50, showing an open [email protected]. Suppose you bought at 100.50 also, but didn't have a lead-in lot. You are at [email protected] Let's compare that: Me: [email protected] You: [email protected] I show an open profit of +50, you show a +-0. I bought the 2nd one at a 25pip discount from...
before i tear your argument apart, i will say this.. there is no one way to trade, to each his own and if you can't respect that and want to call average downers losers then okay.

okay.. let's go.
i buy [email protected], price drops down to 99.50 and i buy [email protected]

you buy your first [email protected], then, according to you, if the market moves up to 100.00, you will buy another 1 to add to your winners.

excuse me sir, what is the difference between our orders now???????

we're all bulls in this case. all in the same boat.

i'm with wolf on this one.

tbh, everyone who is a trader would be lucky enough to be in the profit on a trade, i would TP and so be it. why the fuck would you add to your winners?
  • #199
  • Mar 11, 2014 9:46am Mar 11, 2014 9:46am
Why averaging down when you can hedge progressively (incrementing the % of the main position) if price goes other way?!

Then if you see reversal you can even close some hedge positions on profit.

And this will save the day if the market continues the wrong way for way more pips than you expect - at some point the hedges will cover 100% of your losing position, or at least much of it - it all depends on the market conditions at the time.

Anyway - averaging down and not using SL is a strategy that intrinsically includes "black swan" event (it will happen eventually) - and you will burn a lot of capital (maybe all the capital...).
  • #200
  • Mar 11, 2014 2:44pm Mar 11, 2014 2:44pm
Quoting twoblink
{quote} I present you with math; I present you with reasoning, I present you with a quotes from a multi-millionaire trader; I present you with idiot traders who average down; and you reply I'm sure without reading anything, and with a petty ad hominem. I hope you do nothing but average down and lose your shirt since you love it so much. You are correct, I am scared of average down, unlike you; so go ahead, average down all you want, but please don't ask why you lose money when you do.
lol

"I present you with math" -- No, you presented a selective one-sided scenario where averaging in is clearly more profitable in hindsight. That's not math or reasoning.

There are countless scenarios where the optimal strategy is clear in hindsight. The whole point of trading is that you don't know what is going to happen. You can't know the optimal strategy, because you can't know for certain what price will do. All you can know is how you trade, and what you're willing to risk.

Averaging down does not mean you have to continue buying as price continues to drop. You can still clearly define your risk, and average down up until that point. Giving the example of a portfolio manager who averaged down a losing stock all the way to bankruptcy is a ridiculously extreme example.

Price is at 100. You buy one lot, I buy one lot. We're both even.
Price moves to 150, you buy another lot and average in, I sit tight. You're now sitting 2 lots at 125, I'm 1 at 100. We're both up 50.
Price moves back to 100. You're down 50, I'm net even. Not averaging up is the better decision. The optimal strategy would be buying both lots at 100 and closing at 150 (obviously).

OR

Price is at 100. You buy one lot, I buy one lot.
Price moves down to 50. I buy one more lot, you sit. I'm now sitting 2 lots at 75, you're 1 lot at 100. We're both down 50.
Price moves up to 100. You're net even, I'm up 50. Averaging in is more profitable than not. The optimal strategy would be buying both lots at 50 and closing at 100 (obviously).

In both examples, there is an optimal strategy, a middle strategy, and a least optimal strategy. Depending on price action these will shift around.


Moving on...

One aspect of risk that is rarely ever addressed in trading is opportunity cost and ambiguity-- missing out on profit, in other words. I think if you have well defined money management rules, averaging down can reduce opportunity cost when you want to enter a position but are not sure if it still has a little bit of steam left to move against you. Market swing high and lows often hit and probe the same price areas multiple times, offering a slightly better price to enter at after the initial bounce. But when you don't know whether that bounce is coming or not, and you don't want to miss the boat completely, it may make sense to enter with a smaller risk and try to average down as the opportunities present themselves-- within a clearly defined risk level. Your profit will be reduced if price never allows you to average down, but you will have some profit.

Theoretically, averaging down is never optimal in hindsight, but neither is averaging in. Buying full lots at the lowest price and closing them out fully at the highest price is optimal. THAT IS MATH. But as I've tried to stress, analyzing the market in hindsight is a fruitless, irrelevant exercise, and many traders despite their best efforts do have to deal with non-mathematical risks, e.g. emotions and feelings, that may be just as important as money management, if not more so.

Losers hype up market cliches.


-Smittens
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