You would almost certainly be MORE profitable--in terms of risk/reward, and profits/drawdown--if you stopped averaging down. Likewise, if roulette had positive expectancy (obviously, it doesn't), and there were no limits on betting size, one could Martingale (or anti-Martingale) her way into a fortune, but trading is very different from the roulette wheel. In TRADING but one could use OTHER forms of money management and do it more effectively.
I'm not sure I understand, please explain how not averaging would be more profitable. Basically if my timing is right, I'll make money on a trade. If its wrong, scaling pyramid-style turns losers into winners when the stock does eventually rebound (which theoretically increases its probability the lower it goes), or recovers losses even if the original purchase price level is never reached again. (And I'm not familiar with roulette or martingale.)
See my earlier answers on this in this thread. In short, less exposure on big winners, and more exposure on big losers. If your position goes immediately in your favor, your exposure will be less, since you are saving your bankroll to average down.
You guys might be talking about two different trading styles. One where the person is expecting to add more units to an existing position as it goes against the trader, as a strategy, which I think is wrong. The 'expecting' part of it. The second is adding to an existing position only if all others factors still merit taking a new position. Not with the purpose to save the original trade, but because if you considered 100 to be a good deal, all else being equal, then 90 has to be a better deal yet.
That is what makes a market, different styles, different amount willing to risk, different time frame we all have a different personality when trading, What ever works for the trader to feel comfortable
I only speak from how I have seen others use averaging down as a strategy. Last year a trader friend of mine made money consistently for 6 months straight, almost everyday and blew up his account in one day. The day the market didn't came back to save him.
Quote from joeb8822: That is what makes a market, different styles, different amount willing to risk, different time frame we all have a different personality when trading, What ever works for the trader to feel comfortable I agree with you joeb8822, it is much easier for some traders with a huge account to play MM ( Flipper for example) on the high liquidity markets. But for the most of retailer traders on the futures markets it is unacceptable. No one is able to differentiate a trend retracement from a trend reverse, no one can be sure the support or resistance are going to hold.. I`m trading DAX and sometimes ER2 . I was making approx. $2000 a day trading 1-2 hours and $10000 to $20000 a couple times a month. I had only one losing day a month usually $4000-$5000. As you guess I was averaging down and it worked. It was a very low volatility in September and I lost first time in my life 9 days from 20. I went down from 110 ticks trading 34 ticks chart trying to decrease my losses. I was losing $1000 to 2000 on loosing days and was making $600 to 1000 on the winning. I knew one day volatility will increase and so my profit. But how long I have to wait- days, weeks, some people sad till January. So, I decided to scalp with the tight stops. I started with 1-2 contracts and it was difficult. I felt like a recovering alcoholic. I was making $200-500 a day in the beginning without any losing days. My worst day was $8 dollars in green. I`m averaging around $1200 now. Today for example, I made $4500 on 192 contracts. I found it is difficult to except a few small losses in the beginning, felt like a stupid. But now I found my new style more relaxing because I don`t have to worry about a trend direction, I don`t have to sweat and ask God help me , help me, turn around this freaking trend. So, each trader should decide what is the best for him/her to take a few but painful losses a year or work hard on the trading technique and take many but small losses during a day and be profitable at the end.
You are right so if it holds you ride it for good profit, if it does not you take a quick loss and move on to the next trade. Just like you are doing now, which is in my humble opinion, the most relaxing way to squeeze profits from the market. Anek
Trader b52, I think your story rings a bell with a lot of us here, I found personally to what I call, (work the trade) fade in and out and yes I may leave some on the table and yes I may no give back much when the trend reverses as well, but I look at it this way, I have, god willing a million more trades to take so I never look at any one trade like it would have been (the one that got away) sort of speak every day the index you trade moves a certain amount based on volatility we move points a day right now, just look at the ATR heck, just 2 months ago we where averaging 25 points a day so if you miss a huge trade don't worry we will get another big move tomorrow never beat your self up about your trading We all try really hard to trade the right way, but in reality the right way is what enables us to trade every day and enjoy it that is what counts. Funny you mentiond taking a loss and how hard it is to do I just did a short video on you tube, Called "Behavioral Trading" http://www.youtube.com/profile?user=TradePilotPro Take Care, Joe B.
I really like this post. I dislike when successful traders like yourself start an educational thread, but the author stops posting because he always has to justify his way of trading. Could you please post more examples of the how and why you trade the way you do. Try to ignore the negative posts. Before you enter a trade do you already know where your "uncle" point is? If you enter a trade at the first support level and the market moves in your favor right away will you Average Up? Or do you just let your small position ride? When you are loaded up do you hold the total package to desired profit target or do you scale out? Does averaging down help with your commissions? I would imagine you do not flip your positions that much during the day. Thanks, Cokes