This is not rocket science. With ANY form of averaging down/up: (1) You expected return remains the same. (2) Your volatility goes up. The only "benefit" is psychological.
While I say I never 'like' to avg. down, adding to a winning position is always optimal, I do find myself averaging down on certain trades here's why. If I am in a long let's say and sell program or headline knocks market down, I will occasionally double down at a lower price. I do this initially not to get a new lower cost, but to try to scalp back some of my loss. If I'm right and get back 30-50% of my loss, I kick out half. I know my real avg cost is not what shows on the screen, but 25% more on what's left because I sold half at a 'loss' off avg. cost if you follow. If stock goes up I am still long, if it goes down I may try to do it again. Every situation is different, this is just something I've learned to do over many years. My GOAL on a loser is just to get back to scratch initially, then reevalute. Sometimes this trade may actually then become a winner where then I 'press' or avg. up as you say. I was always told as a young trader don't 'trade' your mistakes. I don't live by that anymore. One of the reasons I am a successful trader is that I put more time and effort into not losing money then I doing making it. Best Offense is a Good Defense? - or something like that. Letting winners run is easy for me, it's fun! Trading around losers is where you find out a lot about yourself and your guts for this biz. Having said this, my one major rule is have stops and NEVER, EVER blow them out. EVER, or you won't last.
my 2 cents..... If every time you are loosing a trade you average down, you prevent yourself from being wrong, thus inhibiting your growth as a trader. Being a good trader = being good at taking losses. In essence we are cutting off the feedback from the markets when we do this. Psychology says if I bought it at this price and it goes down wow, what a bargain!, but this is what must be overcome.
im a total newbie, but heres my take. before entering into a position i usually know what size im going to trade and what risk im willing to take so i feel that it isnt wise to average down, but if your building up your position as a whole when the market goes against you it is different. if i take a position and it goes against me then it probably isnt doing what i expected and the technicals for that entry have changed so i would just get out.
Ever thought about taking partial losses as the trade goes against you after entry? For example. you buy 2 lots at 20, you decide that if it price violates support at 16 you want out. So after getting in at 20, price falls to 18, you let go of 1 lot, if it continues down, you cut the second lot at 16. This is essentially the opposite of averaging down.
Doc if you read my post earlier that's what I did the first few times and came out even or a little +, since I took a loss and then averaged down. Had I not taken the initial loss at first I would be up a few more G'ss last month.
averaging down is a perfectly legitimate strategy if your plan calls for it, especially if you are using a statiscal arbitrage strategy, however, limits and stop losses should always apply. Trade with an edge.
i have never averaged up and average down into every position that goes against me. it has worked well for me, but you have to make sure to have a clear stop point, for me it is a set dollar amount for the day, not the position.
bumping a 2 year old thread cuz this is a good discussion. Do any of you hedge your averaged down positions?
Quote "Hanover" from forex factor http://www.forexfactory.com/showthread.php?p=3116534#post3116534 hanover Commercial Member Member Since Sep 2006 3,322 Posts OK then let's do this topic to death all over again........ No betting system, including Martingale, offers any advantage in expectancy over flat betting, over any number of trials (trades). Prove the laws of math wrong, by using the attached XLS. Go on, you know you want to! Type any combo of values into the yellow cells that result in the gray cell (AK8) having a non-zero value, and re-post the XLS here. Then ready yourself to accept the relevant Nobel prize. (all assuming there are no bugs in the XLS formulae ) Let's apply some common sense. If it were possible to gain any kind of edge at roulette by varying bet size, everybody would go down that path, and casinos would be forced to change the game mechanics. It's not just the table limits that restrain you. Sure, they're there to protect the casino against a freakishly lucky punter, but even without those limits Gambler's ruin would ensure that virtually every punter who doubles up repeatedly will end up bankrupt long before the casino does. Similarly, if it were possible to win at forex by using MM (i.e. varying position size or method) alone, then surely every trader would go down that path, and become a millionaire. The 'willing-buyer, willing-seller' and zero sum game constraints provide proof that this is an impossibility. Averaging down will give you +EV to whatever extent the probability of price reverting to a mean improves, the further it trends away. Increasing one's bet size as probabilities improve is smart (ask any Blackjack pro). But increasing one's exposure without limit is guaranteed to eventually result in irretrievable drawdown. Here's the rub. Let's say we average down, doubling our pos size every 10 pips. If price moves 80 pips against us, that's 1+2+4+8+16+32+64+128 = 255 units at risk. So we need odds of 255 to 1 in our favor that price will reverse 10 pips, before it falls another 10, to justify that bet size. The problem is that our bet size is based on our desired account balance, and is no longer commensurate with the probability that's being offered by the market. And let's not forget that costs must be overcome. With a 2 pip spread, you'd need price to move 12 pips in your favor (TP) before it moves 8 pips against you (SL). Ironically, Martingale guarantees a 100% win rate, until you lose everything. The only consolation is that the losing sequence that causes the 'death trade' might not happen during your lifetime. Irony #2 is that the longer you live, and the more often you trade, the greater the probability that you'll encounter it. There might be several hundred chambers in the gun, but you never know which one holds the bullet. Maybe it won't happen until the year 2030. Or maybe it will happen next week. There are lots of ways to mitigate the effect of the Martingale: 1. You can use a less severe betting progression (e.g. Fibonacci steps, d'Alembert, etc), but then it takes more than 1 win to return to breakeven, i.e. you cripple your recovery rate. You need multiple wins without intervening losses, making recovery more difficult. So you're effectively offsetting one type of risk with another. 2. You can start with a nanolot pos size, but then your return is reduced in proportion with the risk. Not much point in having a $10k account and winning only 10 cents per trade. (Then, after (say) 10 losses, having to risk $204.80 just to make 10c!) 3. You can cut your losses and start over, e.g. after 5 losses, but then you're back to sizing at 1 unit, so you'll need 1+2+4+8+16 = 31 consecutive wins just to recover to breakeven. Or after 6 losses, you'll need 63 consecutive wins. And so on. Just another way of crippling the recovery rate. 4. You can withdraw winnings from the account periodically, but in doing so, there's less funds there to provide a buffer against a prolonged losing streak, thereby increasing the probability of a margin call. And there's no guarantee that you'll make the withdrawal before the death trade occurs. The conclusion is: In any activity that involves uncertainty, return is always somehow commensurate with risk. To assure a 99.99999% win rate, you have to take an 0.00001% risk of losing everything. The innate, perfectly balanced equilibrium ensures that there's no exploitable loophole, no free lunch. Anybody can get lucky in the short term. And maybe more than once. But I assume that most folk here aspire to be traders rather than gamblers. Having said that, there's no law against using forex as a vehicle to gamble, and with more leverage than any casino will ever offer you, should you choose to. Good luck! Attached Files