Most traders lose money, that is a fact, therefore when most agree that something is flawed, look out, there might actually be some wisdom behind those words. Just like every money management technique, averaging down is also extremely dependent on the skill and discipline of the trader. Obviously on the wrong hands, read, most traders and most ET users, it's a very dangerous approach....but on the right hands a powerful weapon. Prix
Excellent post, I couldnt agree more. Everything is relative to the skill of the trader, avging down in the right situations is a truly powerful technique intraday and it takes a skilled and seasoned trader to understand the times when its the right play and times when it is NOT.
A "skilled and seasoned" intraday trader would know better NOT to average down, because that approach would go against the trend and therefore increase one's exposure during inevitable losses. That same "skilled and seasoned" trader knows that one should press winners and cut losers, not the other way around. Nevertheless, the "skilled and seasoned" welcome newbies to average down with conviction., and are thankful for the liquidity said newbies provide.
Some of the most seasoned traders I know don't trend-trade at all, but trade more of a market-making style where averaging down WITH A LIMIT is a key component of their strategy. They'll take steady gains and occasional large losses, but the steady gains more than offset the large losses, becuase they know what they're doing. For me, averaging down will get me killed. But not all "skilled and seasoned" traders trend trade/momentum trade. Basically if averaging down helps you exploit your edge, it's good. If you think averaging down is your edge, however, you will be sadly mistaken when your broker greets you with a margin call.
smilingsynic, you are far too one dimensional you think there is only one way to trade with the trend... and only one profitable money management technique averaging up albeit a nice combination they are by no means the only way to constantly profit from the market First thing trading taught me is that the right way to trade starts by trading with what's best for your psychology while obviously making money and that my preference and style might work for me but not for John Doe. Prix
You arent thinking outside the box it seems, you hear the word "average down" and you immediately think bad bad bad. Not every down move (or up move for that matter) that one can average into is against the prevailing trend (intraday only for index futures). The key is to understand the context of the given situation and to understand the risk/reward associated with the context. And with avging comes a necessary strict money management component. Personally, I just think that its wrong to say that this or that is ALWAYS the wrong thing to do. Trading is all about contexts and applying the same method to all contexts just wont work. Thats why, sometimes, I see a scaling approach as the best choice since I cannot pinpoint the precise turning point and then other times, its all in at one price with a tight stop. Just depends on the given day and given scenario.
True, but that was not my point. There are some countertrend traders who do not average down, but all of those who average down go against the trend. Likewise, there are some trend traders who do not average up, but all of those who average up are going with the trend. My point throughout this thread is that on a RISK/REWARD basis, averaging down is a poor approach to position sizing, EVEN IF ONE USES STOPS. I am not denying that some traders make money averaging down (the question is whether they can KEEP it). But compare their drawdowns to their profits, and one would be less than impressed. On a risk/reward basis, it is more prudent to sell rallies during a downtrend, and buy dips during uptrends. This conclusion is based, personally, on literally hundreds of hours of testing the data. Averaging down means buying dips in downtrends, and selling rallies in uptrends, the complete opposite of what the evidence suggests is sensible. Sure, a good kicker might be able to kick a 60 yard field goal into the wind, and a decent quarterback might be able to complete a pass into double coverage, but wouldn't it be easier to kick with the wind, and throw a pass to a wide open receiver instead? If there is an easier, surer way to success, why not go with it?
The justifications, rationalizations and arguments for averaging down are all well and good. However, the salient point is that you are adding to a position at a time when you are clearly and demonstrably out of sync with the market. Whatever your method may be and however smart you may think you are, you still have no idea where or when the market will turn in your favor. The only thing you know for certain is that the market is going against you and you are adding to your position when your initial entry was improperly timed and you are demonstrably out of sync. Feeling lucky? I don't see why. As I noted on the previous page, averaging down is acting like you know something precisely when your account is assuring you that you do not.
Swordsman, On an intraday basis, how do you KNOW there even is going to be a "turning point"? I bet the traders who averaged down last Friday were praying for just ONE turning point. Alas, it was not to be, and some trading careers bit the dust. Trading is not about wishy-washy stuff like "context", it is principally about NUMBERS (Drawdown. Risk/reward). Please show me how averaging down is MATHEMATICALLY a superior approach.
smilingsynic if you buy major dips of the daily chart during a bullish market or buying major support like adk suggested you are essentially doing the same thing you suggested but on a bigger scale except that due to massive volatility you are scaling in the entry Prix