I am refering to futures ES and NQ contracts in this thread but I guess it can be applied to stocks as well. As a rule I never add to losing positions, but actually try to add to winners. I am able to do this for all time frames except for scalping for obvious reasons... However, I only know 5 profitable traders..( I am not one of them) all who trade futures.. ALL 5 ADD to losing positions.. averaging up or down depending on direction of trade... ALL 5 are profitable.. I just dont see how its possible. Take today for example, every time you added to a short position the market kept going up against you, they all averaged up on their shorts on ES and NQ. They all are holding who knows how many contracts open saying the market will pull back tomorrow... But what if they gap it up first and you are down -20pts on 50 contracts..(ouch) just looking for opinions...
In this market, I don't add to a losing short position, but do add to losing longs. The reason is that I believe the major short opportunites are just about gone vs. 1-2 years ago. Nowadays, I buy a small position, and if it goes against me I average in, and then average in again, which brings down my cost basis. I wait for market spikes like we have had today and sell into that strength. Its a good strategy in a choppy, traders market like we have lately. triple
I EXPECT THE ANSWER HAS TO BE MODIFIED BY YOUR CAPITAL LIMITS AND TIME FRAME YOU TRADE AS A GENERAL RULE, UNLESS YOU HAVE A LOT OF CAPITAL AND A POTENTIALLY LONG TIME FRAME (NOT INTRADAY) I DON'T RECOMMEND ADDING TO LOSING POSITONS. I HAVE DONE IT MANY TIMES. THOUGH SOME WITH SUCCESS - OVERALL WHEN I WAS WRONG IT REALLY COST ME SERIOUS MONEY. DON'T KNOW IF THIS HELPS - BUT ONLY YOU KNOW WHAT RISKS YOU CAN AFFORD TO TAKE AND HOW LONG YOU AVERAGE. PERSONALLY, I FIND SIGHTENING STOPS AND CUTTING MY LOSSES - EVEN TO BREAKEVEN - IS PUTTING SAFETY BEFORE GREED.
Sounds like you are trading in a prop office, since you are so familiar with what these 5 successful traders are doing. Or are they virtual acquaintances, i.e. are you getting their trades through a chat room or similiar? Of course it depends on what kind of trading you are doing - i.e. time frames and entry based on technical vs. fundamental criteria (and it's almost surely technical if we're talking day/swing trading ES/NQ). In my opinion, the only time you would average down is if you are making an investment in a company for the long term and have a good grasp on the fundos of their business, or if you have inside information. Maybe if you have been trading for a long long time and know that you will eventually close a losing position rather than incur an unacceptable loss (in percentage terms) of trading capital, you can average down. However, it strikes me as a little strange that you would know 5 successful traders, all of whom would advocate averaging a losing position down instead of exiting and re-entering at a more favourable time. None of the successful traders I know would do this in a purely trading situation. Bottom line, this is only for those who have established themselves as successful traders - IMO, NO BEGINNER should do this.
NEVER AVERAGE A LOSS-DON'T ADD TO A LOSING POSITION Trader Vic-Methods of a Wall Street Master...pg.182
i don't average down, BUT an extremely talented and sucessful hedge fund manager i know personally does. best, surf
One of the most suicidal things you can do in trading is to keep adding to a losing position Marty Schwartz...Market Wizards pg.268