However, I don't know if I am going to be right about direction so how can I know if I'm going to be correct when I have my maximum size on?
I don't know if I am going to be right about direction so how can I know if I'm going to be correct when I have my maximum size on? That is done by entering your positions in layers. Instead of going all in at once you break up your entry into several smaller positions - only adding on when you existing positions are profitable. With some experience you will get good at when & where to add on. It not only makes your size the smallest when you are wrong, it also makes your size the largest when you are right. Here is an example of layering in - I rang the register taking a large profit out on one position - yet I still am long on 2 prior layered entries, this makes letting the profits run a lot easier.
One could always cherrypick a few trades to support averaging down, and also to bash averaging down, but if you want to become a consistent (profitable) trader, you should look at the bigger picture, and not just pick a few points out of a huge set of data. If you look at it with a neutral and open perspective it should become clear that averaging down by itself is neither good or evil. It is a simple money/ position management technique that by itself is neutral. The doom (or hail) comes from combining it with other factors. Traders that dont use any (good) risk management, traders that overleverage, traders that have no edge in the market... for those traders averaging down will destroy their account, sooner or later. Just a matter of time. For a skilled trader who has an edge (whatever it might be), sound risk management and who knows how to use leverage responsibly, averaging down can be the right tool in certain situations to react to a move in the markets.
If one trade with fundamental data, after entry the stock drops further, if the fundamentals do not change and one has conviction, adding makes a lot of sense: Buying on further markdown. One example is TEVA, averaging down after the August 2017 selling climax would have been very profitable, especially long TEVA options. It is cherrypicked but generally true: Another example: GILD....
May I ask what was your rationale for selecting the second and third adds? I would have guessed that you wanted to add near the 12/4 and 12/11, second third minimum, if you are a chart reader. Regards,
Because I am a momo trader - I go long only on strength and and only add on to positions when I already have a decent profit from earlier positions. For longs I only enter at considerably higher prices - on moves out of congestion. I would never want to make a new entry if price is currently moving counter to my position(s). The first entry was the second test of a major support line - when price crossed below it than closed back above support it showed strength & a rinse job to puke out the weak hands.
This is a great argument and its hard to argue it won't work. But I think it over-focuses on price instead of set-up. This causes a bias towards stops which are too tight, which serve as money-saving mechanisms rather than responses to price action. Alternatively, it could be used (abused) as a way of avoiding setting a stop-loss at all. What I mean is - if I want to get long in an on-going uptrend, I aim to do it at the lowest available price level within the parameters of my set-up. If price is any lower, in theory literally 1 point lower, it would have fallen through the "base" of my set-up and I'd have to wait for price strength to re-assert itself. If price was higher than the lowest level available, then this is a mis-timed entry, either too early in a pull-back, or too late during a trend resumption. So for me, the better solution isn't averaging down from a bad starting point, its getting a better starting point.
Yet its very possible for price to fall by massive percentages under the same fundamental environment. Unlimited fishing for entries which are lower and lower will lead to ruin sooner or later.