AVERAGING down/up = success?

Discussion in 'Risk Management' started by buybig, Feb 15, 2009.

  1. buybig


    Hello, folks.

    comments to this thread --> http://www.elitetrader.com/vb/showthread.php?s=&threadid=147017 led me to wonder a few things.

    1st some comments:

    "I think averaging down is like cheating on your trades."

    "Averaging Down is an unavoidable disaster if the trader does not implement proper planning and preparation."

    "In the right hands with the right methods it's a very powerful money management technique."

    "Only those in the dark blow up with it. Sadly, the vast majority of the traders fit the "in the dark" profile."

    "Second that. It's an "advanced" technique and should not be used by a novice trader that doesn't apply appropriate money management in his trading."

    "never ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever ever average down"

    "Averaging down is not always disastrous if used in the context of investing when you are building a position."

    on to the questions:

    1) it seems the consensus is to NOT average into a loosing position. but people in the know can do it successfully. So for those in the know what is a general frame work to work within?

    2) lots of general statements but, wouldnt avergaging down be related to risk tolerance, bank roll, defined stop and most importantly LEVERAGE and time to hold?

    3) do stocks vs options vs futures averaging operate under different parameters?

    4) the question im dying to know is a framework for averaging UP. Given a set stop loss w/ NO avg down.

    sure i could go on forever. been on this forum for a while and never really heard ANYONE say how to do it successfully. Just that it can be done by few successfully. If so, please enlighten.


    SIDENOTE: I have averaged down in the past and came out ahead. BUTTT it scared the hell out of me.. Tried it a 2nd time lost a bit but used my SL. What really hurt me was saying "the market cant sustain this rally" DOH..
  2. I'll just post a quick one here giving my view on averaging down and why there are many different opinions.

    Averaging down clearly can be very risky, but someone people "get away" with it, therefore thinking it can be a valid idea.

    First of all, to continue to average down, you need to have extra $ available.

    For example say a stock @ $50 - Buy 100 shares for $5000.
    Stock goes to $5 - buy 1000 shares for $5000
    Total Position now = 1100 shares - $10000 cost
    Stock rebounds to $14/share - person sells out for $15400 - brags about how they made $5400 while breahing a sigh of relief.

    Now, pretend the stock didn't go back to $14, but instead continued to fall and hits 10 cents - this persons position is now only worth $110.00 despite having $10000 into it. Most traders would now have lost the guts to continue to put bad money after good.

    However, lets say this trader takes one more shot at it and puts their last $5000 in, thus getting 50000 shares.
    Now their position is:
    51100 shares - cost $15000

    stock now rebounds to .40/share. Trader sells out for $20444, and now has a profit of $5444 while again realizing how lucky they were.

    Again, pretend stock doesn't rebound to .40/share, but goes down to .02/share and then all of the sudden trading is halted by the exchange and the stock is gone. The trader has now lost $15,000 when they could have lost alot less if they had just spent the original $5000 and not tried to average down.

    So, I think sometimes a person's opinion on averaging down and probably averaging up as well is largely determined by how they have done with it and how much "guts" they have to continue to buy when a stock is falling, etc.

  3. Redneck


    Even for a shot of making averaging down work – you have got to know

    1.) The personality of the stock you’re trading
    2.) The time of day
    3.) The environment (market sediment) in which you’re trading
    4.) Lately I be more predisposed to average down in a short position, but definitely not in a long (But again this statement is too ambiguous) You really need the ability to quickly, accurately, and dispassionately access the current environment your trading in, your position, and act accordingly

    You asking to define (explain how I) make a judgment based on experience – and I don’t know how to do this

    So as a rule to share - I don't average down - in reality sometimes (although rarely) I do

    and sometimes it works, and sometimes it does not - but I am prepared to live with either outcome
  4. rickf


    Since November I have averaged-down and -up for a few positions I care to hold for a longterm horizon of 10+ years.

    Price was at 17.50 when I bought my first 100, then I bought it down every $2 down to 13.50 then back up to 19.50. As a result of DCA'ing into this holding, the position is now up nearly 45% despite the ebbs and flows of the market in recent months.

    The position is now profitble quite nicely -- had I gone "all in" as most retail folks are prone to do, it would have been heartwrenching. Frankly in this very volatile market, DCA works best .... saves you a lot of stress when trying to build positions you firmly beieve in for a LONG TERM timeframe.

    Note this is not the same as averaging down to save a loser --- my investment thesis for owning this stock hasn't changed, so when it fell down to my next buying point, I did not feel bad buying into it. Should my views on the stock/sector change, sure, I'd bail out.
  5. If you average down you better know your game well and that includes a heck of a lot more than meets the eye.

    In the wrong hands it is playing with fire.

  6. rickf


    Very well said!

    Too many people will average down out of desparation --- and then get screwed as a result.
  7. Averaging down with 100% of capital into a bankrupt company that will not bounce at all is a bad idea, correct.
  8. Redneck


    SusanaDT & rickf

    Just stated it a lot better that I

  9. The very best traders that I have come across "average".

    For mere mortals averaging turns into spiraling losses. It's a very special skill that isn't common even among successful traders.

    Unless you've got the bank balance, confidence, track record to prove you can do it -steer well clear, or keep an eye on the situations vacant column.

    CNBC endorses dollar cost averaging -I rest my case.
  10. buybig


    and that is why im asking the question.. WHAT part of the GAME? More than meets the eye? well thats the life of a retail trader.

    Please qualify your statements. A simple broad cautious generalization does nothing to prove or disprove. on the flip side you say it can be done but, not by anyone here? Am i missing something? :confused:
    #10     Feb 15, 2009