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Increasing size on a loosing position

  • #41
  • Jul 21, 2006 10:58am Jul 21, 2006 10:58am
Quoting radicalmoses
Hi, twoblink,

For all the rhetorics on moneymangement you seem to make a comman mistake of equating the theory of stock markets to Forex markets. After reading all your explanations its quite evident that you are the one who doesnt get it.
Akuma did quite a good job of explanation and I wont go into the depths of explaining it again. However I will give you a couple of reasons why you are dead wrong with the math and if you do take time to read and understand it, maybe you will see the other side too.

1) The explanation you have given is quite correct because you cant buy anything under 1 share of the stock, However for forex ,suppose my initial lots to trade is 1Lot, I can break them into 0.5lots for first entry and 0.5 lots on the second trade. Now you do the math again please and tell me I am wrong.
Initial price of entry for example 1.8500 gbp 0.5lots, SL = 1.8400
2nd entry 1.8450 long , SL = 1.8400
Average price is 1.8475
Risk = 75pips against 100pips if I had entered at 1.8500 with 1 lot.
This is just theoritically but the math is there for you to see.

2) All currencies are volatile and we wont see any currency lose all its value in the neartime future unless we have a catastrophy.
Stocks on the other hand are subject to company fundamentals and can go bankrupt anytime. Case in point is Enron.

3) You think averaging down is foolish, mutual funds do it all the time.

Its not what you do but how you do it that matters.
No, the British Pound will not go to zero. But if you take a look, at some point in time, the USD was bigger than the EUR.. And apologies if your pockets are deeper than mine; but at some point in time, you cannot fade all you want, because it "might" not come back.

Quote
Initial price of entry for example 1.8500 gbp 0.5lots, SL = 1.8400
2nd entry 1.8450 long , SL = 1.8400
Average price is 1.8475
Risk = 75pips against 100pips if I had entered at 1.8500 with 1 lot.
This is just theoritically but the math is there for you to see.

Your math is correct; but your reasoning is not. You are buying at an Average price of 1.8475 now, where as the market is now at 1.8450, so you have OVERPAID. I probably "don't get it" as you say, why overpaying is good. Your example is earmarked with a few assumptions. If I was in 1 full lot (which I wouldn't be, would be in at 0.5 lots) and it dropped to 1.8450, I would exit and take the hit, on half a lot. That's it. I would be at -50 pips, which is as still 25 pips better than your double entry, and I am out of the market now, just in case it kept on dropping, which it might (if it is trending down). I don't know, and neither do you. But I know I have mitigated my risk a lot better than averaging down does.

Quote
2) All currencies are volatile and we wont see any currency lose all its value in the neartime future unless we have a catastrophy. Stocks on the other hand are subject to company fundamentals and can go bankrupt anytime. Case in point is Enron.

True. But we can see (take a look at the Yen) some +-900 pips. That to me, looks like serious devaluation.. Going from 121 to 10X is DAMAGE in my book.

Quote
3) You think averaging down is foolish, mutual funds do it all the time.

Its not what you do but how you do it that matters.

Thank you for reminding me why I don't buy mutual funds. Mathematically, averaging down is foolish, it's not a "twoblink" thing, it's a math thing. Second, Mutual fund usually don't allocate something like more than 1% of their funds to any particular stock. Third, mutual fund managers get paid EVEN IF THEY LOSE YOUR MONEY.

Like I said in my book, I am not here to try to convince you. You will average down, I will average up. I have seen the holocost highrises of averaging down. I will shout at the top of my lungs "Never Again!!" You, you are the man of your own fate, if you are happy averaging down, God bless you and I wish you well. I mean that from the bottom of my heart. You do what you need to do to survive, I will do what I need to, to survive. May we have a drink and laugh about it in 20 years when both of us make a fortune.
google:
  • #42
  • Jul 21, 2006 11:16am Jul 21, 2006 11:16am
twoblink, I think you make some wrong asumptions.

You have the ideea that the SL will be hit more than the price will return. That's not what I'm saying.

You think that I or others add to the lossing position until we win or brake even. NO, until our strategy is still valid. For the seccond, third, forth, etc. position it's the same SL as for the first.

If you are -20 pips and your SL is at 30, and you don't think that's still a good trade, why not setting SL at 20 pips?

So, I trust my strategy that until SL is hit it's still going to work, and in many cases it's working, why not taking advantage of this? If you don't think the same way about your strategy your SL is set wrong or you have some issues with it.
Try hard, think fast, die young
  • #43
  • Jul 21, 2006 11:33am Jul 21, 2006 11:33am
dof,

Because, someone wise beyond my years has told me; I ASSUME I am incorrect until the market proves me correct. I exit because I was wrong, not because it has hit my stop. I exit because it hasn't gone my way.

So if I'm in at 0.5 lots, and I put a SL at 50 pips, and it's at -30 right now, I will probably exit. I was wrong, no need for me to have it hit -50 and have the market prove me wrong and force me to exit. I exit on my own.

"CUT YOUR LOSSES AND LET YOUR PROFITS RUN." If I'm showing a loss and it's shown early, that means I'm wrong and I am out.

Quote
If you are -20 pips and your SL is at 30, and you don't think that's still a good trade, why not setting SL at 20 pips?

Because an SL is the emergancy brakes.. I also have the FOOT BRAKES, which I use all the time to cut my losses early.

Trust me when I say, I absolutely understand what you are saying.. Up until 2 months ago, I did exactly what you did, and thought exactly like what you thought. After reading 14 hours a day, on this stuff for the past 2 months, I no longer think that way. I've wrestled with the beast before. I've won 95% of the time doing what you said. It was the 5% that wiped me out and cleaned my clock.

What you describe will work 95% of the time. But just know, he who lives by the sword, dies by the gun, because he didn't know about the gun...
google:
  • #44
  • Jul 21, 2006 11:37am Jul 21, 2006 11:37am
BTW, when you show a loss and you enter a position again, you are being a contrarian.. and a contrarian simply is a top and bottom picker. You not only are fairly certain that your stop won't hit, you are so certain that you've doubled down on it, thus overpaying for a bad position already.

I can't stress it enough, do the math of it.

It is my hope that this guy can explain things better than I can because obviously I'm failing badly. That's probably my fault...

http://www.investopedia.com/universi...iveminute6.asp
google:
  • #45
  • Jul 21, 2006 12:00pm Jul 21, 2006 12:00pm
Quoting radicalmoses

1) The explanation you have given is quite correct because you cant buy anything under 1 share of the stock, However for forex ,suppose my initial lots to trade is 1Lot, I can break them into 0.5lots for first entry and 0.5 lots on the second trade. Now you do the math again please and tell me I am wrong.
Initial price of entry for example 1.8500 gbp 0.5lots, SL = 1.8400
2nd entry 1.8450 long , SL = 1.8400
Average price is 1.8475
Risk = 75pips against 100pips if I had entered at 1.8500 with 1 lot.
This is just theoritically but the math is there for you to see.
I'm kind of wondering about this statement. This doesn't quite capture what I understood that actual practice of averaging down is about. What seems a bit off to me is that you're comparing a single 1 lot position to two half lot positions in your example in the wrong manner.

Assume for a moment that I'm a trader trading .5 lot. We'll use your same figures. My risk position is 100 pips on .5 lot or $500. However, if the price goes against me 50 pips, and I average down, I buy another .5 lot. You are correct that the overall risk on my WHOLE position is 75 pips. But, I've doubled my position size. So, even though I've reduced my pip exposure, I've increased my monetary exposure from $500 to $750. I think this is a more accurate approach to looking at the issue and why there are a number of traders who do not like to average down.

With that said, understand that I respect this as a valid strategy and approach for some people. It's just not for me.

Regards,

stockwet
  • #46
  • Jul 21, 2006 12:29pm Jul 21, 2006 12:29pm
http://www.sierrainvestor.com/articl...nagement1.html

Quote
The Importance of Money Management techniques in investing

January 2005
By: Michael Doran and Avinash Agrawal



Money management is the one of the most significant parts of any trading system.

Money management is that portion of your trading system that tells you "how much" to risk on any investment, or set of investments : how many dollars of your investment should you put on any stock at a given time? How much risk should you be willing to take?

Aside from one's personal psychological issues, this is the most critical concept one needs to tackle as a trader or investor.

Interviews some of the top traders and investors also show this. Practically all of them talk about the importance of money management. Here are a few sample quotes:
- "Risk management is the most important factor; its should be well understood. Undertrade, undertrade, undertrade is my second piece of advice.”
- "In order to take advantage of a positive expectancy investing system that has a large number of trades that lose a small amount of capital, and few winning trades that yield a large amount of profits, you need to make enough trades, so that even if a lot of them yield small losses, you will be able to find the few that do make you lot of money. To achieve this in practicality, money management is key”
- "Never risk more than 1% of your total equity in any one trade. By risking 1% only, one is indifferent to any individual trade. Keeping your risk small and pre-set, is absolutely critical to lessen drawdowns.”
- “You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you can’t afford to do is throw away your capital on suboptimal trades.”

Losers average losers: Martinagale systems increase bet size when the trade is going against you. Some people try to buy more of a stock that goes down. This is the wrong way to trade. Cut any losses at 7%-8%, much sooner if possible. Since the stock market shows trends, averaging down is simply adding more to a losing position, and thus a losing strategy.

Always average up : Antimartingale systems, where you increase your risk when you win, do work. Smart investors know to increase their bets, within certain limits, when they are winning. Money management systems that work call for you to increase your position size when you make money. This can mean additions to your positions when a stock pulls back (on light volume) to the 50-day moving average, or one a breakout from a second- stage base. This is also espoused by good investing disciplines, like William O'Neil's CANSLIM system, and others.

So there are two aspects to money management: the percentage of total capital to be invested in one particular stock, and the stop loss percentage on that particular stock. (Some people believe that they are “managing their money” by having a stop in place. However, this kind of stop does not tell you “how much” of your total equity to invest in one stock. Your money management model determines the size of your position.)

A good rule of thumb is not to risk more than 1% of your total capital, on any single trade.
google:
  • #47
  • Edited 2:17pm Jul 21, 2006 1:53pm | Edited 2:17pm
Averaging down is a big mistake. The fundamental reason to average down is to prove to yourself that you're right. That means that you have a hard time being wrong, which means that you're going to consistently lose.

The guys that make money and who actually do this for a living average up. That's where long term profits come from and is the "secret sauce" of the pro's...
Mr. Trend
  • #48
  • Jul 21, 2006 4:10pm Jul 21, 2006 4:10pm
Quoting stockwet
I'm kind of wondering about this statement. This doesn't quite capture what I understood that actual practice of averaging down is about. What seems a bit off to me is that you're comparing a single 1 lot position to two half lot positions in your example in the wrong manner.

Assume for a moment that I'm a trader trading .5 lot. We'll use your same figures. My risk position is 100 pips on .5 lot or $500. However, if the price goes against me 50 pips, and I average down, I buy another .5 lot. You are correct that the overall risk on my WHOLE position is 75 pips. But, I've doubled my position size. So, even though I've reduced my pip exposure, I've increased my monetary exposure from $500 to $750. I think this is a more accurate approach to looking at the issue and why there are a number of traders who do not like to average down.

With that said, understand that I respect this as a valid strategy and approach for some people. It's just not for me.

Regards,

stockwet
If you open you position with 1 in the begining you are risking 100. If you open only 0.5 in the begining and after that opening another 0.5 ypu risk 75. So you risk only 75 in stead of 100. Also if the price goes back in your direction you make 25 more. Right?
Try hard, think fast, die young
  • #49
  • Jul 21, 2006 5:34pm Jul 21, 2006 5:34pm
Quoting Mr Trend
Averaging down is a big mistake. The fundamental reason to average down is to prove to yourself that you're right. That means that you have a hard time being wrong, which means that you're going to consistently lose.
The guys that make money and who actually do this for a living average up. That's where long term profits come from and is the "secret sauce" of the pro's...
It can be a very costly mistake, even if your system is sound. You just never know when it stops working. Adding to a winning position works wonders when you're right and know what you are doing.

I couldn't resist selling gpb/jpy last night's spike after it failed top for the second time. And again today after seeing nice hanging man forming I doubled up. I will probably add more when it breaks 214.80 and let it ride. If it goes against me, I'm out for a small loss. Averaging down? Well, you know my opinion (not necessary right)...
happy trading.
,,
Attached Image
  • #50
  • Jul 21, 2006 6:12pm Jul 21, 2006 6:12pm
Quoting raczekfx
It can be a very costly mistake, even if your system is sound. You just never know when it stops working. Adding to a winning position works wonders when you're right and know what you are doing.

I couldn't resist selling gpb/jpy last night's spike after it failed top for the second time. And again today after seeing nice hanging man forming I doubled up. I will probably add more when it breaks 214.80 and let it ride. If it goes against me, I'm out for a small loss. Averaging down? Well, you know my opinion (not necessary right)...
happy trading.
,,
I was in one of Steve Nison seminars about candlesticks and he said that hangimg man has no value for him. It has to be a shooting star on top and hammer on bottom. Inverted hammer on bottom or hanging man on top has no value.
Try hard, think fast, die young
  • #51
  • Edited 7:21pm Jul 21, 2006 6:33pm | Edited 7:21pm
Gee I can't understand the hullabaloo, I think there is a few here missing the point of the strategy, fading a position is not higher risk than opening a full lot if planned properly, I don't care how complicated the math you want to throw at it. Before placing a trade you should know 4 things:

 

  1. Where you want to enter (entry)
  2. Where you want to exit (target)
  3. Where you your trade idea becomes wrong (stop loss)
  4. How much I can afford to risk on the trade

So if I decide my short trade entry is 1.000, my trade idea is wrong, i.e. my stop is at 1.100 and my target is 0.800, and my account size, margin level, risk ratio, allows 1 full on this trade then the rules are clear.

If I open 0.5 of the 1 lot I am allowed at 1.000, and the second half at 1.050, where is the downside to this trade? My stop has not changed so nothing wrong there, my target is the same, and my lot size allowed is identical as opening the whole lot at 1.000, all that has happened is my net entry position is now 1.025, my risk has now reduced and my potential profit has slightly increased. Ticks in all the boxes as far as I can see.

Anyhow I'll stick with what I know works for me. I think we are getting confused between "scaling in" to a position, and "adding" to a position.

You can quit and they won't care, but you will always know.
  • #52
  • Jul 21, 2006 6:34pm Jul 21, 2006 6:34pm
Steve is a nice guy and he's entitled to have his own opinion.. What works for you, might not work for me and vice versa (even if we used a same system)
You get 100 eyes watching the market, you'll get 50 different opinions..

Quoting dof
I was in one of Steve Nison seminars about candlesticks and he said that hangimg man has no value for him. It has to be a shooting star on top and hammer on bottom. Inverted hammer on bottom or hanging man on top has no value.
  • #53
  • Jul 21, 2006 6:38pm Jul 21, 2006 6:38pm
Quoting raczekfx
Steve is a nice guy and he's entitled to have his own opinion.. What works for you, might not work for me and vice versa (even if we used a same system)
You get 100 eyes watching the market, you'll get 50 different opinions..
Well i thing with 100 eyes you will get more than 50 opinion.

Of course that's true, what's working for you may not work for others, but still, he did some research on this matter, not only translation from other foreign books. He might have something to say, might...
Try hard, think fast, die young
  • #54
  • Jul 21, 2006 8:45pm Jul 21, 2006 8:45pm
Quoting dof
If you open you position with 1 in the begining you are risking 100. If you open only 0.5 in the begining and after that opening another 0.5 ypu risk 75. So you risk only 75 in stead of 100. Also if the price goes back in your direction you make 25 more. Right?
Yes. But, that's not averaging down. That's reducing your risk exposure. It's not an equivalent comparison to say that I'm going to cut my position in half so that I can afford to average down if the need arises.

In any case, the point is that you should be looking at money management from a money perspective, not a pip perspective. If $75 is the maximum you're willing to lose on a position, then you shouldn't be entering the position with a 100 pip stop loss, it should be 75 pips. Or, you can average down with two half lots. As I said, it's a valid strategy for some, just not for me. But, it's misleading to newbies to imply that averaging down reduces your risk when, compared to the originating position, actually increases the risk.
  • #55
  • Jul 22, 2006 4:07am Jul 22, 2006 4:07am
Hi,

It looks a bit like we are going around in circles and looking at the same thing with different view points.
I think I need to clarify my viewpoint with regard to what I mentioned in my previous post.

I think most of you will agree that you never get in at the best price. How many times have you taken a position and watched the price go against you and when your stop loss is almost taken out, it reverses to go in your direction. Each negative pip against you makes you more nervous and you dont know whether to hold on or let go of the position.
Traders live in an environment of regret and greed.

When I mentioned that we need to average down, I ofcourse did not mean that you need to average down if prices keep going down by 500pips. That is ridiculous. If you are risking 1Lot for 50pip S/L, it will cost you 500$.
How ever if you take 2 positions of 0.5lots with the same S/L but different price, averaging down, it will cost you less and increase your profit.

Lets be clear about one thing, if I am pretty sure about the direction,and if I could get an exact entry and have the position go in my favour the exact moment I put on the trade, I wouldnt need to be here on the forums.
Ofcourse there maybe some who get it spot on everytime, but I am not one of them. I dont average down indefinitely and I know my stoploss level and I break it down knowing that I have the direction right, I just need a better price. There needs to be a clear distinction between moneymanagement and trade management.
  • #56
  • Jul 22, 2006 4:30am Jul 22, 2006 4:30am
Quoting twoblink
http://www.sierrainvestor.com/articl...nagement1.html
I agree with all of them who support the fact that its almost impossible to catch the right time and price to enter a trade.

There is one more factor which we are not considering:

Even if the price turns immediatly into profit for you, unless we are in a big quick trending move (see pound or euro in last 3 days), for the nature of the price action of forex , it will never turn into your site for a number of pips that will satisfy you in the first moment. For this reason, the probability that the trade goes against you is almost a normal rule in FOREX ( STOCKS IS SOMETHING ELSE..), even if you are right about the main direction.

let say you enter a long at pound-dollar 1,8251. it goes to 1,8263.
at this point you are not satisfied to get only 12 pips, so you wait.
for his nature you have a big probability it will go back to 1,8253 probably, and this can start to scare you..maybe it goes back to 1,8240..and then from there meet buyers interst and go to 1,8290.
unless we want to scalp , I think this is the nature of forex.

Keeping a loosing position and fading in a STRONG TRENDING MARKE against you is wrong (if you are able to reconize in time), but keeping a position and fading in RANGING MARKET (until a given limit you decide) is for me a good system. 90% of times a loosing position always turned into profit, in maximum 2 days. (in the worst case). sometimes I mistake of course and close in loose.

So the point is : Is more profitable (or less risky), to exit everytime the market moves against you of 20-30 pips and reenter, or stay in until a given level you decide and increase in the meantime ?
  • #57
  • Jul 22, 2006 9:22am Jul 22, 2006 9:22am
Quoting Mr Trend
Averaging down is a big mistake. The fundamental reason to average down is to prove to yourself that you're right. That means that you have a hard time being wrong, which means that you're going to consistently lose.

The guys that make money and who actually do this for a living average up. That's where long term profits come from and is the "secret sauce" of the pro's...
Mr. Trend, you are SPOILING my book!! I haven't gotten to the secret sauce part yet!!



Quote
So the point is : Is more profitable (or less risky), to exit everytime the market moves against you of 20-30 pips and reenter, or stay in until a given level you decide and increase in the meantime ?

I gave an arbitrary number of 20-30 pips; it doesn't matter; what matters is what are your rules?

Group A) I assume I am right until the market tells me otherwise. (i.e. hitting my stop means I'm wrong, otherwise, I'm right).

Group B) I assume I am wrong until proven right. So even if I'm "in the black" on a trade but it's not what I originally planned for it to be like, I'd exit.


The question you have to ask is, which group am I in..??

I can tell you which group makes money long term.

And I agree with stockwet, splitting your lot size in half is not the same as averaging down when you are wrong.
google:
  • #58
  • Jul 22, 2006 4:20pm Jul 22, 2006 4:20pm
Quoting twoblink
Mr. Trend, you are SPOILING my book!! I haven't gotten to the secret sauce part yet!!

Mr. Trend
  • #59
  • Jul 23, 2006 1:24am Jul 23, 2006 1:24am
Quoting twoblink
It is my hope that this guy can explain things better than I can because obviously I'm failing badly. That's probably my fault...

http://www.investopedia.com/universi...iveminute6.asp
Note that the referenced investopedia.com article includes the following:

"I want to mention that the comments in this chapter focus on scale trading as applied to stocks only. Scale trading can be a viable strategy when applied to commodity futures, mostly because commodities have inherent value meaning that they cannot decline to zero value. But even then, it requires a lot of capital and advance planning to be successful. Individual stocks can and do become worthless on occasion, which is one of the main reasons why scale trading is such an unfit approach for stock investing".

Of course, major currencies also have the inherent value attribute which makes the author's comments not applicable to them per his own clarification.
  • #60
  • Jul 25, 2006 4:56am Jul 25, 2006 4:56am
OK, I'm going to change my tune here and encourage everybody to average down.

The reason is, first, obviously my plea for most to NEVER average down, doesn't work; some people seem to even infer that I'm the stupid one for not averaging down. So yes yes yes people, average down. Despite all the math I have shown you, go ahead and average down.

The other reason I need people to average down, is because I average up. That means when the trend is up, and I need to buy, I need someone to sell to me. That said, when the market is going down, I need to sell, and that means I need people to buy, and be the other side of the market for me.

So now I understand; for me to succeed, I basically need to take the money of all those who average down. So the more OTHER people average down, the easier market entry I will have.

Thank you people..
google:
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