I was thinking of different ways of controlling risk when averaging down (or rather scaling in) on an intra-day basis in the futures market. The issue I have is whether to use a certain price level/area where you exit for a loss, or rather a monetary stop on the trade. The other aspect is that with averaging down you end up with a huge loss on your max position size and make frequent profitable trades with a smaller size. How do you deal with that? You enter the trade, starting small, it goes in your favour, you close it - then I regret it was only, say, 1/10th of the max position size. I would appreciate any advice on how to deal with this issue - how do you manage this?
"Averaging down" and "scaling in" (on an intraday basis in the futures market, or any other basis in any other market) are two radically different things. "Averaging down" means adding to losing positions, re-entering additionally at what you perceive is a better value price, which will turn out to be right if your original entry turns out to be correct and valid in spite of the movement against you subsequent to your original entry. It increases your risk exposure. "Scaling in" means adding to winning positions after your original entry has already turned out to be correct, typically (but not always) not increasing your original risk exposure. This decision you need to have made (on a conditional basis) before the original entry. Personally, I put an initial stop-loss where I want to be taken out of the trade if the price reaches it, on the grounds that if that happens, my original entry has proved not to be a correct/valid one, and that this is one of my inevitable losing trades. I know before I enter what proportion of my trades are losers, and at what point I want to exit, if that happens. Or add to it? Because it was a good entry? I know only one professional trader who "averages down" successfully. For myself, I avoid it like the plague. For me, "the first loss is the cheapest".
I can place scale orders at different levels hoping the future goes against me and I pick up at each price, looking for a reversion later. I want to buy at each price, even though I lose in the short term. I have done this in the past looking to profit from sweep orders. You can't expect to make money on every trade the second you trade them.
Averaging down is dangerous. It takes only one big, bad trade to kill your year or even wipe you out. Anecdote.... This story was in one of the commodities or futures magazines. I just happened to be watching it as it unfolded. (I didn't participate, but I was following it real-time.) Some MM guy boasted that he hadn't had a losing trade in more than 20 years. His play was to divide his capital into 5 tranches and averaging into trades that went against him. Not once in 20 years did he fail to "get away with it", as the market always reversed "in time" for him. Until one day... you can guess the rest of the story. He averaged short S&P futures into a bull market, and it finally went far enough against to stop him out. Not only did he give back 100% of the gains made in 20 years, he lost 100% of his clients' original investment... PLUS the clients had a debit balance they had to pay of about 75% of their original investment.
To me, averaging down means taking a losing trade, adding more to it, when you should be exiting, because your assumptions were wrong. Scaling into a position over time, is not the same because your expectations and assumption have not been breached. You are simply assuming you will never know the perfect price to get in or out, and are looking to benefit from price movement, but want to make sure you have at least one unit in play so you don't miss out.
I hear you, of course, Bob ... for myself, I trade from pretty fast charts (not scalping) and I need a trade to move in "my direction" fairly quickly after entering, otherwise my entry was probably mistaken, in which case I want to be out as quickly and cheaply as possible. My perception, exactly. (Until a few months ago, I always used to say that I didn't know and hadn't even heard of a single successful, professional trader who ever "averaged down". I do actually know one, now. But it will never be for me.)
My take on averaging into a losing trade goes something like this. Let's say I come across a chart I like a lot where the price is $85 and has recently bounced off of significant support @$80. Rather than wait/hope for a retest of $80 (which might not come), I would buy some at $85 and hope to buy more at $80. To me, that's "averaging in". It's also "averaging down", but the connotation is way different.
We agree. In addition, if I thought support was 80, and that was my max pain, and I buy a little at 85, 84, 83 with a stop at 79, and I start buying that 78, 75, that is bad.
Exactly right. Basic as that chart and bias play is, I suspect many traders don't understand or practice it.
thank you for your input, but no one has addressed the issues I mentioned - how do you manage when you buy 100 units at 85 exit at a profit but then on another trade you lose on 2,000 units? Do you have a minimum trade size you have to make whatever happens?