I haven't read this whole thread so maybe this has been mentioned... There is such thing as averaging up and down in the same trade. If I'm taking a long position in anticipation of a breakout then I will be happy to buy it lower as long as the chart is "in tact". Meaning if I were to still view it as a long trade, then I'm willing to buy it. A stop point is where the trade is no longer in tact. Once you average down and the trade starts doing what you expected then you can also average up into the target breakout area. I do this every day on every trade and it works.
I'm guessing that most people who average down are not quite as circumspect. Even so, I have a question. If you average down while the chart is still intact by your definition, then this means that you have not taken a full initial position. Therefore, if price goes immediately in your favor upon initial entry, then you are traveling light until you begin to average up. On the other hand, if price begins to go against you upon initial entry, you add unless an uncle point is reached. This suggests that you will be fully loaded if price goes against you to stopout, whereas your initial position will be smaller if it immediately travels in your favor. And so my question is: do you think this the best way to go about it? As an aside, I'm guessing that you use relatively wide stops. Would that be correct?
Well said...When trading discretionary,I often look for buy zones based on Fib retracements or some other voodo of a higher time frame,and then base entries on a breakout/ma cross of a lower time frame..IMHO,its the safest most prudent way to seek trade retracemets/extensions
So true..and a hint, most all major institutional trading desks use dynamic entries (scale-ins). If you have a properly tested and analyzed entry method, that is of multiple entries, you are not doing anything terribly wrong. I would also note that dynamic entries are in no way a holy grail, just another means to increase the capabilities of a proven system.
My average winning trade probably consists of 3-6 entries depending on how long it takes the trade to work out (and about the same # of exits). In the case where I can get shares lower, then I don't have to get as many shares at the break out as I would otherwise. That gives me a better average and allows for wider stops. There are some cases like you mentioned that the trade just works too fast, and in those cases there's not much you can do. Trading like this requires you to trust your gut instinct on whether the move is just a wiggle, or breakdown...assuming you have good instincts Regarding how wide the stops are, when I see a chart as a candidate, I also see where I would consider the chart to be "broken"...that's my stop. Something like BIDU could have a $2 stop, whereas some trades can have a 2c stop.
can you show us the equity curve of your averaging down strategy? i believe i have officially seen it all.
I'm sure it has been said already but you have it exactly wrong, averaging up is the holy grail (this is distinct from scaling in to a position at a defined risk point or range).
T-Dog,IMHO this magical topic really boils down to ones "Entry Efficiency"(For long positions,Highest price minus the entry price, divided by highest price minus the lowest price.) If you have a winning system that shows an average Entry Efficiency,then scale in...And before I get jumped there are ways to turbo Entry efficiency,but thats classified
Averaging up or down has merits... I'll give an example as to how it can be done. Let's say someone who is trading futures (ER or whatever index they trade), and typical account is 20k. The key thing here is to divide that account by 4 - this means that maximum number of contracts/positions traded is 4 with a value of 5k for each contract. Wait till market is oversold, can use any indicator but easiest one is to wait for 3rd day down then enter first position. Market goes down next day (4th day) enter another position on a 10-pts. dip, and so forth. Each of the 4 positions is entered on 10-pt. levels. This translates to buying dips for a max. of 4 days after market being oversold. 8 out 10 the market will have dead cat bounces or just start a new swing in opposite direction. It's a simplified version. Hope this helps. Cariocas