Trade with averaging down on a simulator for half a year and you'll be forever cured of that folly. (likely sooner but I doubt any longer) I do not want to sound person bashing but (long) experience taught me that those who revert to that strategy have not a real (strong) edge in the markets Normally it is only a matter of time until blowing up. Remember the old casino expression: The casino will sent a car to pick you up if you want to gamble. They'll sent a chopper if they know you are averaging down. Maria
I agree with the guys who are trying to talk you out of it, especially for the more leveraged short term type of trading. The problem or "seduction" is that the market will often reward you for this behavior often many times before it finally gets you. Kinda of like walking up to a craps table and winning several times in a row. About the time you think you've got this game beat you make a big bet - and lose. Sooner or later the odds catch up with you. Another good point someone else brought up is that averaging down usually not only keeps you from taking a small loss but also prevents you from being on the right side of the market. Where in most cases you would not only make back your original small loss but, if it turns out to be a runner, you could make even more. Something that's tough to do when your fading a move.
Well, the casino is different as they have limits, no such thing in the stock market. However, I am well aware of the consequences of continous cost average. What I am suggesting, is different although judging from some of the traders here, destined to fail as well so don't think I will even give it a try as I have great respect for some of the posters who shared their input on this thread.
Thank you for your post. As soon as you mentioned the word "seduction" I sort of predicted what you will say next and it all makes perfect sense. Time to search for a new strategy and be grateful that I averaged down in the past without paying the consequences.
Cut your losses short and let your profits run does not imply averaging down or fading moves to me! Maybe I have missed something.....
This subject has been discussed here many times. One camp points out that adding to losers is dangerous and violates the cut losses principle. The other camp points out that it is a good way to avoid losers and capitalize on the tendency of most tradeables to back and fill. I'm not here to recommend one or the other. I do think it is better to use this strategy on tradeables that are somewhat less volatile and are highly liquid. It's also crucial to have the discipline to dump the entire position at a certain point. A common situation is a stock makes what looks like a breakout type move and you jump on. It pulls back into a basing formation. Maybe it pulls back to a pivot, an obvious retracement point or whatever. It's not a bad move to add at that point on the theory that it will at least make another try in the direction of the original move. If you add equal size, it only has to go halfway back to get you back to b/e. The key is either to exit at b/e or if it moves past it, don't let it go back below b/e. The other important aspect of doubling down is to have the patience not to do it too soon. You want to give the trade time to find a level and room so that you materially improve your basis. This can get a bit tricky if you are also partialing into a full position. Part of you wants to get the boat loaded, the other part wants to wait to get a better price.
New trader with no knowledge: buys again as position moves down. Well read trader, learning: never average down. Experienced trader: it depends; are you building a position at the right price? Note: Those who ask "would you rather have a whole position only when it's a loser" fail to see the possibilities of scaling in above and below your initial signal.
This is going to sound a bit presumptuous, but I honestly do not mean it to be so. There are times when averaging down is effective, and I assume that you obfuscate those times, because you characterize averaging down as "addictive." This means that you average down according to the usual emotional impulses of fear and denial that non-professionals succumb to. No professional ever describes his behavior as "addictive." No professional ever seeks validation for his addictions. The only times you average down are when you <b>know</b>. Your cathexis should only be for recognizing patterns and seeing your intuition verified.
Lets differentiate between 2 different things here 1- Averaging down on a loser (only done coz one refuses to take a loss and hoping for a come back) 2- Building up a huge position (planned and intended) The first is a no no for me, the second is way beyond our discussion here. now let the war begin