Averaging down is addictive

Discussion in 'Strategy Building' started by Neet, Oct 13, 2006.

  1. I concur. At least for day trading.

    If a trade is really going against you, you're not in tune with the market and probably should not be trading until you know whats going on. Take your loss and sit out.

    Problem with averaging, is once you start, you are commited to a dangerous path: Not being able to admit you are wrong.

    If you had 2 contracts on, by averaging you say "I cant take this as a loser...." and add another 2, to 4 contracts. Then it moves another 6 ticks against you, and if you couldnt take the loss for the first 2 contracts, you're certainly not taking it for 4 contracts. So you add another 4.

    Eventually, you pull it on a day with a 12-20 point up move and you're short 16, and at the end of the day you're looking at a $3000 loser.

    Had you just taken that first loss, you would have eaten maybe a $150 loss and probably gotten on the right side of the market

    And, of couse, as soon as you puke out your position, the market will finally give you that turn that would have let you scratch out.
    #31     Oct 14, 2006
  2. Neet


    Ok how about the following scenario.

    Take AAPL for example, quite a volatile stock.

    Say you want to daytrade 1000 shares but you have no idea how the crazy fruit will respond during the day.

    First position 200 shares.

    If it runs, you scale in and continue to do do until all 1000 shares are loaded and you are content with profit, locking a stop or trailing stop at average entry to ensure profit.


    If it goes down. What if you scale down every 3/4 of a percentage until you reach your desired 1000 shares and hold until the close of the day. Always using your hard stop, say 4-5% from first entry.

    Would this be an acceptable scenario for averaging down or still driving faster when you are lost ?

    Thanks for input.
    #32     Oct 14, 2006
  3. Neet,
    I like your example about AAPL.

    you have to be aware of something called opportunity cost.

    In your above example if the trade goes in your way you would be taking profits quickly and then will look forward for another opportunity but if the trade goes against you and you start averaging down then sit back and wait for it to go the other way around or wait to liquidate at the end of the day then you have lost many opportunities along the way, you just sat on a loser locked your money there and waited for a miracle because simply now to even take a profit it means you will want AAPL to move the other way around not just few cents but longgggg way which if ever happen will take long time.

    so simply when you jump in and find urself wrong, just cut your losses short and QUICK so you will have all your money to jump in as soon as you find another opportunity

    Got what I mean ?
    #33     Oct 14, 2006
  4. Anyone here into Averaging Optimization & Martingale/Kelley Variation Models applied to Index Futures hedging?

    Is there an optimal way to position size your shorts
    to protect profits already made by your long trades?

    I was just wondering can these models be modified in a long/short position sizing hedge? i.e. Spread scalping or even swing trade averaging...

    on the same contract for example, YM,NQ,ER2,ES with Diff accts?

    The Ormond System:
    Negative progression, a variation of the Martingale System.

    Assumes you will win before you reach the house limit and can bankroll the losing run. Bet an initial amount (N). For each win, on the next bet N again. For each lose bet N*x+N where x is the number of losing bets. Thus if you finally win, you will recover all bet money, plus N for every loss. The progression would look like this on a $5 table. 5, 15, 35, 75, 155, 315, etc. As with all negative progressions, and this one even more so, it requires more capital and is employed to force a winning outcome following a losing streak.

    Anti-martingale System: Positive progression.

    Remarks: pre-decide a win, say 7 units
    Bet on red. if win leave the two on red (or switch to black if you feel like it). If win again leave the four on another even chance. If win the third in a row skim the seven and restart with one. Every time you lose restart with one.
    #34     Oct 14, 2006
  5. Neet



    Yes, I hear you loud and clear. Keep your losses small so you can move on to a possible runner (winner) instead of sitting on a probable loser.

    However, in this market you need wide stops because its too volatile (AAPL is a 1.7 Beta stock), might as well average down when the price goes against you, meaning down but not below your original stop.

    Let us just say, it seems to me averaging down WITHIN your stop range, doesnt sound like a bad idea as long as you dont use more shares than the ones originally intended.

    Afterall, the stock price will most probably fall below your entry because of its nature, high beta.

    Maybe AAPL is not the best high beta example, IIVI would be most in line, but much lower volume.

    Hope all this makes sense, got kids jumping all over me as Im trying to post this :)
    #35     Oct 14, 2006
  6. aapl got too competetive, long gone the times when was up every day and likely to trend 3-5% in 1 session. now it's dominated by bots and they are very vicious. i seem to regularly take punishment in this stock, and for good reasons. maybe better stay away from it and trade less popular issues.
    #36     Oct 14, 2006
  7. Neet



    Here is a tip that helps me with AAPL. As long as its consolidating, it follows RSI and MACD 85% of the time.

    Good luck.
    #37     Oct 14, 2006
  8. Yes, that's the rub.
    #38     Oct 14, 2006
  9. Neet,
    sorry to disappoint you but I don't agree on this strategy :)
    Believe me I tried all this before and learned my lesson the hard way.

    If I enter a trade I do so as I think it will go in one way, if it doesn't then I am wrong and I just exit.

    I know that your strategy will work 99% of the time, but wait for the undesired 1% and the pain will make you cry.

    you enter with for example 100 shares, and then you start averaging down to 1000 shares, now guess what every extra cent down adds $10 to your losses, now the 1% happen and it never goes back and you sell for a huge loss compared to your average winners and locked your money in a losing position for long time.

    Think of it the other way around, adding to your winners, I know its not easy to do so as normally people don't like the idea of having average cost higher than their initial cost but actually now with every addition your average cost is way less than the current price and every cent going in your direction will make you feel much more happier.

    Anyway, Good Luck.
    #39     Oct 14, 2006
  10. Bit,
    I trade AAPL and its great but yes I am one of those bots :)

    In the past I traded it manually and it was great too and I think there is alot of opportunities in AAPL.

    What other stocks you trade ?
    #40     Oct 14, 2006