Average down - small wins, big losses?

Discussion in 'Risk Management' started by Peblo, Oct 8, 2017.

  1. Peblo


    When one averages down on a position, it entails taking only small winners when the price moves in the direction of your position instantly and does not allow for more entries at a better price. On the other hand, your losses are made with your biggest position size. So, you have small wins and large losses. How can that be a profitable strategy?
    comagnum likes this.
  2. Canoe007


    It's not. At least not as far as I can see it.
    Early on in trading I was once reluctant to take a small loss, so it got larger, and larger, and larger. Just enough regular repeats of pause & waffle in price on the way down to let me "believe" it would recover. So doubling down when it looked like it was reversing I ended up sitting on a negative $14K USD position. I lucked out and over 3.5 days I ended up closing the position for a $1,200 loss. Had I followed my rules and taken the small loss (< $200), then later entered as indicated, I would have made somewhat over $8K. I'm lucky the loss was so small and that this incident slapped me early on in my trading so I never did such again.
    comagnum likes this.
  3. TKOSTA74


    i will tell you my point of view
    i do not average down so i have no experience.
    when you average down against the trend you will lose.
    people tend to average down on a trading range or where there is more two sided trading. betting it will come back to their entry point and on the second entry make a profit,or break even.
    ps i have had about 15 beers and this is the best i can think of.if it doesn't make sense do not sue me
  4. Big AAPL

    Big AAPL

    This very well may be the classic post of 2017. Wisdom and intellectual abandon in the same paragraph (sort of).
  5. Handle123


    All my systems are automated now, but no matter, they average down whether scalping or day trading. I had to build your systems differently in which my goal is to get the greatest percentages to make on original entry of "BE" plus one tick, then profitable trades of 2-8 ticks, but I had to get losses 6% or lower. As far as day trading, I had to be better than think I was capable to hit this mark cause if giving the trade longer than "mean" average to get to BE plus one tick, going to be losing for the day, day trading usually has higher losing percentages cause am hoping for larger profits. I have to take the opinion that profitable trades allow me to get in and quickly goings in my direction, so my patience is thin on time. Because day trading systems for me have higher losing percentages, reduction of signals to only take certain signals to ave down and other signals don't ave down. When I speak of BE plus one tick, if you averaged down at 8 separate levels, all exit at the original BE plus one tick so I might end up getting +9, +8, +7...+1 or if happens fast enough you can get +16, +15, ....+8 if 8 ticks was original target, all can be at that target.

    Now the bad news, more levels you put on, your loses will be like to stubbed both toes on up to top of your head and wishing you never heard about averaging down. When I first started doing this, it would be 3 months of hard work tossed out the window of profits killed from one trade, little by little you learn to read charting better, rely on your back testing more and "time" to get to BE plus one tick. I have 8 signals with trend and 2 counter trend, risk is shorter on counter-trend on sell side in mornings where there is greatest volume. I mainly ave down on Scalping systems, and no, I do not make wildly profits per trade with ave of $12 to 17, getting harder as the markets going higher, bars gets tighter.

    For me, am able to ave down on almost every Buy signal but few on sell signals, my losing percentages are better on sell side. So for whole week you could have been up for the week, but one trade the big stop loss price was hit and BAMM wieners for dinner. You have to do an insane amount of back testing and be firm believer of your stats to identify that in long run it works for you. I have reduced my levels but increased size to adjust to changing conditions in ES, retracements not as deep for me.

    I never advise to average down to anyone, you have to be able to trade and not concern yourself about the money and won't get suicidal thoughts.
    beginner66 and PennySnatch like this.
  6. ironchef


    Depends on your methodology:

    1. As a long term investor or a value investor, you buy because it is a bargain. Unless your assumption changes, when the price goes down again, it is an even bigger bargain, so why not buy some more, unless the size already exceeds your Kelly?

    2. It is different if you are a trader. In this case your entry has nothing to do with value, rather it is based on some short term indicator expecting the price to go up. When it does not happen you better get out because it indicates your indicator is wrong. So, you move on and try something else.

    Am I making any sense?
    stockmarketbeginner likes this.
  7. It’s definitely ok to average down, within reason, and if possible only in ranges or in a strong trend, make sure you can easily tell when its not a trend or range anymore.

    Trick is to know when, not if.

    It’s also very much ok for your losses to be much bigger than your winners as long as your overall expectancy is positive.

    Be smart and flexible, think outside the box.
    murray t turtle and Zodiac4u like this.
  8. Turveyd


    It's okay, but your method needs to support it, ie making enough on the upside to cover the downside easily.

    Your likely trading range, issue being by the time you see the range the range is likely over then your counter trend and being forced to bail with small profit, before getting a big loss, even the trades that turn your way you exit way too soon as no real way to tell what its going to do. Wasted 5 years trying to perfect this lol give up sadly :(

    Trend on the other hand, its okay try this simple BB setup.

    Bb 24sma 2.2

    Join the direction of the 24sma , then average in within the BB range, exit on direction changing or BB breaking, this will get you small losses and if you let it run, big profits, I go 50% first trade then 2 others at 25% aswell, still make good money off single position.

    I had a year where the DAX just ranged, averaging worked great, till it started trending then ouchhhhh!
  9. just21


    You could turn your outright position into a spread.
  10. tommcginnis


    #10     Oct 8, 2017
    Sprout likes this.