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Averaging Down - Is It Really That Bad?

  • #21
  • Feb 19, 2017 7:38am Feb 19, 2017 7:38am
Quoting hanover
{quote} Copernicus, Not sure if you've seen this, but your mention of LTCM brought it back to my mind. I thought that it might be of interest to you. Soultrader was widely respected when he used to contribute here at FF. I find his conclusions interesting: "The lesson here and my message to you is that no matter how much you test, no matter how far you go back there will always be a market condition that your test does not have. .... System designers need to add one more thing into their arsenal....



when looking backtest and live curves I can simply see the difference as anyonelese and it wasnt a surprise that it will fail

5. How to identify when the market conditions cause the system to fail.
identify when system will fail is such identifying trend and sideways, if it would be possible there wouldnt be any trading market while system would collpase in a day or so due everytrader would make billions
The equity curve should be used to identify, not the price charts

6. What to do when it's failed.
Plan B, nice and true
Attached Images
WaBaS Where are Buyers and Sellers
  • #22
  • Edited 9:05am Feb 19, 2017 8:01am | Edited 9:05am
Quoting mathTrader8
{quote} And yet, watch out this term: statistical significance or just THE sample size ;-） If you check out the default value of "Period" for Bollinger in MT4--it is 20. Seriously? ;-) ==================== His fallacious understanding of this basic concept is more fallacious than you think :-)
==================================

I apologize if I upset anyone-I have zero intention to argue or "fight" against anyone; I just try to point out a "fallacy".

==================================

If anyone changes that default value to something much bigger (in order to retain statistical significance), then Bollinger's stuff becomes even more irrelevant--since financial time series is usually beyond what a simple normal distribution can describe.
IG seems like a reputable company, but it is not.
  • #23
  • Feb 19, 2017 9:04am Feb 19, 2017 9:04am
There is a dinstinction to make between averaging down and multi-entry positioning.

If by averaging down we mean split our position in multiple parts and open them at different levels or different time, like the big boys do (accumulation, distribution), that would make much sense!

If instead by averaging down we mean simple adding to losers hoping that we will be lucky this time too, well that also may work out many times , but it never last forever.
  • #24
  • Feb 19, 2017 9:05am Feb 19, 2017 9:05am
Quoting serpo
The most quoted saying in the trading world is: "Never add to a losing position" and my favorite: "Losers average losers". But is this really true? Does this work in real life? Well that is what we are now trying to find out. The rule of demand and supply determines the upps and downs in the market. It is very unusual to have price to trend in a very smooth and clean way for a long time. Most of the time the volatility is so great that it causes uninitiated trader's stop losses to get hit prematurely. Let's now start with a simple comparison of...


Averaging doesn't work because you need to double or triple the size every time.

This leads to a quadratic or cubic growth in the risk that will grow exponentially.


Some years ago such EAs where very popular... During backtest they showed good results only at the beginning when the risk started to grow exponentially all crashed.
Buy at the Low, Sell at the High You make money by waiting not by trading.
  • #25
  • Feb 19, 2017 9:50am Feb 19, 2017 9:50am
Averaging down is pretty simple and effective if done right.

For Example one way to do it:
If one were to open a trade with full 1 lot size, then averaging down would be breaking the 1 lot into 10 entries of .10 lots.
This would provide less risk and a better entry point.

For some reason people confuse averaging down with martingale kind of trading.
Dragon Rider
  • #26
  • Feb 19, 2017 10:46am Feb 19, 2017 10:46am
Quoting barloc
Averaging down is pretty simple and effective if done right. For Example one way to do it: If one were to open a trade with full 1 lot size, then averaging down would be breaking the 1 lot into 10 entries of .10 lots. This would provide less risk and a better entry point. For some reason people confuse averaging down with martingale kind of trading.
Yes, the important thing is to keep all the positions of the same sizes... In that case it can be a viable options if a SL is used.
Buy at the Low, Sell at the High You make money by waiting not by trading.
  • #27
  • Feb 19, 2017 10:47am Feb 19, 2017 10:47am
Quoting tunera
There is a dinstinction to make between averaging down and multi-entry positioning. If by averaging down we mean split our position in multiple parts and open them at different levels or different time, like the big boys do (accumulation, distribution), that would make much sense! If instead by averaging down we mean simple adding to losers hoping that we will be lucky this time too, well that also may work out many times , but it never last forever.
tunera wrote pretty much what I was going to. There's a difference between 'accumulating a position' in a certain price range, and recklessly adding to a worse and worsening position in a desperate attempt to just break even.
  • #28
  • Feb 19, 2017 11:00am Feb 19, 2017 11:00am
how about adding into winners...
All Assets NAS100 GLD BTC AUS JPY GBP All Time Return: 20.3%
  • #29
  • Feb 19, 2017 11:30am Feb 19, 2017 11:30am
Quoting BlackNapkins
Averaging down if is a part of your plan and is controled by your MM, helps to optimizing your entry... averaging down blindly just becose is going down against you is simple madness
Regardless of money management, averaging down is highway to the grave. I was there before. Just like what someone once said on this thread,"it only takes one mistake to ruin everything."
  • #30
  • Feb 19, 2017 11:52am Feb 19, 2017 11:52am
Quoting Phil_GMT
how about adding into winners...
how do you know its winner?
what is you winner measures?
what if it reverse as soon as added?
then is it still a winner?
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WaBaS Where are Buyers and Sellers
  • #31
  • Feb 19, 2017 11:54am Feb 19, 2017 11:54am
Quoting tunera
There is a dinstinction to make between averaging down and multi-entry positioning. If by averaging down we mean split our position in multiple parts and open them at different levels or different time, like the big boys do (accumulation, distribution), that would make much sense! If instead by averaging down we mean simple adding to losers hoping that we will be lucky this time too, well that also may work out many times , but it never last forever.
what if your 1/4 entry made the winner w/o any average needed and the next trade that averaged down 4/4 has lost?
WaBaS Where are Buyers and Sellers
  • #32
  • Feb 19, 2017 12:10pm Feb 19, 2017 12:10pm
Quoting mr.brown
{quote} what if your 1/4 entry made the winner w/o any average needed and the next trade that averaged down 4/4 has lost?
This is a very important point you brought up, and its what ultimately skews the R:R/W:L of any given approach.

Its a balancing act between scaling in - to improve theoretical average - and scaling in - as the move unfolds in your favor. Same for exits.

If entries decisions are tier based, then so should the exits be, as it smoothens both sides of the equation as nobody knows when the move will truly start and truly end:

All in / All out.
All in / Scale out.
Scale in / All out.
Scale in / Scale out.

Scaling in and out smoothens both your entry and your exit. "well, all out makes more money"....if you can predict that is.

This wont work if you cannot define your GTFO exit as it is not about trading into the abyss, but about using the markets natural ebb and flow to position yourself, both in entry and in exit.
  • #33
  • Feb 19, 2017 12:49pm Feb 19, 2017 12:49pm
I trade indexes not currencies but I believe that adding to a losing position is acceptable as long as you do it only at logical entry points using past supply and demand zones and not at predetermined intervals. However, you must get out when you reach your maximum predetermined loss level. This should work unless a black swan event occurs. The markets do rotate. They do not go up or down without pullbacks. Trading is imho mostly science applied in an artsy manor.
  • #34
  • Feb 19, 2017 1:06pm Feb 19, 2017 1:06pm
I should have added to my previous reply that adding to a losing position when the market is at all time highs or low does not work as you have no history to lean on and must GTFO when you see you are wrong.
  • #35
  • Edited 2:09pm Feb 19, 2017 1:54pm | Edited 2:09pm
Consider the simple example in the graphic below. Your strategy assumes that price will bounce back upward (form a swing low) somewhere within the yellow area, and that you risk the same % equity on each component entry. Assume that A, B, C and the SL are evenly spaced.
Attached Image

For winning trades (price reaches TP before SL): everything being equal, price will bounce somewhere between A and B, B and C, and C and SL approximately one-third of the time, each. Hence if this scenario was to play itself out a zillion times -- and an edge involves considering the long term, not just the current trade -- you'd achieve much the same result by simply entering at B every time. In other words, the pips/opportunities you forfeit/gain by having an entry at A would be approximately compensated by the pips/opportunities you gain/forfeit by having an entry at C. Hence averaging down doesn't improve long term expectancy (hence my comment in post #8).

If there is a bias with the bounce point (for example, it occurs most often between C and SL) then you'd be better off in the long term entering the whole position at C. Whereas if the bounce occurs more than 1/3 of the time between A and B, then you'd be better off on average by entering the whole position at A. And so on.

FWIW I agree with tunera (post #26); and also with mr brown (post #34) which is why, personally, I dislike averaging down. If, for example, you're risking 1 lot per component entry, then (on winning trades) approx 1/3 of the time you'll win with a 1 lot trade (swing low occurred between A and B); 1/3 of the time you'll have 2 lots on when price reaches the TP (swing low between B and C); 1/3 of the time you'll have 3 lots on (swing low between C and SL). So when you win, your position size will average out at somewhere between 1 and 3 lots; but when you lose (swing low occurs beyond SL), it will always be with the entire 3 lots. Sure, this is compensated for mathematically by the bigger wins and smaller losses when the swing low occurs between C and SL, but I still dislike it, for personal reasons.

Of course this is merely one of many different ways of scaling in, and exits can be much more complex (e.g. scaling out, trailing SL, move SL to BE, etc) but similar mathematical principles apply in other possible scenarios.

Quoting Copernicus
I had a read of 'When Genius Failed' by Roger Lowenstein who investigated the rise and fall of LTCM.
Interesting read, thanks. Must admit I didn't follow the rise and fall of LTCM as closely as you apparently did.
  • #36
  • Feb 19, 2017 2:02pm Feb 19, 2017 2:02pm
Quoting mr.brown
{quote} what if your 1/4 entry made the winner w/o any average needed and the next trade that averaged down 4/4 has lost?
You are free to adapt your accumulation process with how the market move.

While if retrace get bigger than you originally planned, you can take advantage by averaging down, you can also take advantage from a good market reaction by averaging up.

Let's say trend is strong up, you buy your first 1/4 position at the bottom of the retrace, then market suddenly start going up.
You would recognize the momentum and average up, adding to your position as market move higher.

It is not the strongest specie who survive, but the one who can adapt faster to the changing environment.
  • #37
  • Feb 19, 2017 3:39pm Feb 19, 2017 3:39pm
Quoting hanover
{quote} __ [EDIT] Footnote: your comments about having different strategies for trending markets, mean reversion, etc reminded me of some research that I conducted many years ago, and posted a summary of the results here.
David. Just read footnote now and the associated post. Great stuff. Thanks for that. :-)
  • #38
  • Feb 20, 2017 3:52pm Feb 20, 2017 3:52pm
Large traders scale in/out of a position all the time. Their position size is too large to push a button & be all in/out of a trade. That's an advantage we have as small retail traders.

The reason it works for them & not for retail traders is because they have a PLAN. Retail traders say it's because of account size but that's just an excuse for not scaling in properly. If they look @ a long-term chart & plan the entries BEFORE they start scaling in then they wouldn't get margin-called so soon. If their account isn't large enough they need to wait for better prices or increase the distance between entries.

As an example, I started buying silver (paper & physical) around 16 & my PLAN is to scale-in down to zero. Yes ZERO, as I don't know how low it can go so my position sizes are small enough to handle a move to zero without a margin call. If I'm going to allow that large a drawdown though then I'll hold part of my position for much higher prices. My PLAN is to hold for years if needed to reach profit.

***This works best with a market where you're pretty confident of an extreme high/low. Commodities won't go to zero, I hope :-)
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  • #39
  • Feb 21, 2017 6:54am Feb 21, 2017 6:54am
Quoting RondaRousey
{quote} A plan to scale in to zero is stupid. Once it's zero it stays zero! There is no recovery. Scaling in a position is used to maximize their gains but also increases their risk. Averaging down a position is used to minimize their losses but also increases their risk. Essentially any time you increase your position by scaling in or averaging down you magnify your losses. LTCM failed because those geniuses assumed that they can mitigate risk and took larger and larger positions.The larger the position the larger the...
OK
  • #40
  • Last Post: Feb 23, 2017 11:26am Feb 23, 2017 11:26am
Quoting mathtrader
{quote} Regardless of money management, averaging down is highway to the grave. I was there before. Just like what someone once said on this thread,"it only takes one mistake to ruin everything."
Mathtrader, some say forex is a gamble, some say its a business, this way or another it is a risky business, so very much depends from your approach....
my multiposition never exceed 1% of equity, average down does mean use no SL .... does not mean adding to loosing position without control of acceptable and predetermined risk level... wrong taken trades will be closed where they should be ...
Have nice weekend....
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