Averaging IN (not Averaging Down)

Discussion in 'Risk Management' started by Newc2, Apr 12, 2018.

  1. Newc2


    After looking back at many of my frustrating trades where they were killed not long after entry, I have come to the conclusion that averaging in is the best way to minimize the effect of market noise while also skewing reward to risk in my favor.

    Does anybody have experience with this as I really think the benefits here also extend to helping one's trading mindset? Instead of looking to book profits asap, a trader scaling in is looking to add to a winning trade so the mind is set up correctly from the outset.

    Thanks to @tomorton for ringing a bell in my mind to look into this.
  2. Robert Morse

    Robert Morse Sponsor

    You can't expect to buy at the best price with the first trade and make money in the next 2 minutes. I like to enter with a percentage at the time I want to start. Then I willing to risk not having a full positions if the stock/futures/option goes my way quickly. I'd rather get into the full position over time. Sometimes I have to pay more, sometime I do better. As long as the reason why I got in does not change, I like this path. With each new order I say to myself does this still meet my criteria to add.

    My mentality is that of an options position trader not a scalper or day trader.

    Just my opinion.

  3. Newc2


    Thanks Bob.

    This is what I am finally realizing.

    I looked back at many of my trades where I was taking full positions.

    I would often:

    (a) be stopped out due to oversizing and close stop position due to this sizing
    (b) sell to early due to being in profit and making the decision on the unrealized profits (as opposed to the trade itself)

    'Averaging in' appears to help with this.

    I was always entering a trade in the right area but now know that good trading is more than just this.
  4. Robert Morse

    Robert Morse Sponsor

    I have watched a lot of traders over my 37 years in the business. They make a lot of mistakes, even the good ones. Even me. Especially me. I'm not referring to bad trades. There are always losing trades. I'm talking about the business of trading. I would say the worst are that they play to big, too fast. They either set very short stops vs their profit potential or takes losses that are way too big for their account size. Scale your trades to both your account size, expectations of profits and risk tolerance.

    Set rules for yourself. Write them down. Say them out loud before you start each day. Then have fun. Making money is fun.


  5. Have you thought about buying longer dated deep ITM calls and averaging in via exercise? I'm looking at doing that myself. Maybe selling some ATM premium until the expiration too.
  6. Robert Morse

    Robert Morse Sponsor

    What would be an example with a current equity option?
  7. I'm sure there are all kinds of ways, but for example, buy an ITM leap call, sell some nearer OTM calls, or even ATM call on the same leap expiration, and then when expiration comes around, exercise your ITM call. I'm actually looking at doing some of this myself to "average in" over a period of a couple of years while selling premium too.
  8. Robert Morse

    Robert Morse Sponsor

    I'm not a fan of that and I'll explain why. You take the time and effort to choose a stock you expect will out perform other stocks and the market. You buy a long dated call options to limit you losses and reduce your cash/margin layout. I'm liking that part. Then, you limit your gains when you are right by sell short dated calls as another hedge, when you hedged already by buying the call vs the stock. When you are wrong, you lose the net debit which is likely way more than you can make if you are right. If your expectation is that the stock will slide sideways, there are better ways to execute that and make money.

    I'm not a fan of the buy-write 1:1 or what you described unless it is a short term trade. I find the math does not work over time. IMO.......
    Newc2 and Chubbly like this.
  9. Jack1960


    Take a look at The Arora Report. They have had great success with averaging in. They use tranches and put lot of focus on position size to control risk.
    murray t turtle and Newc2 like this.
  10. TDMA


    That only works for capital trades, not income trades, so unless you can differentiate in your methodology you will at best achieve a 50/50 benefit with scaling, however due to the way the markets work in reality it will be 80/20 against you.

    We scale in tranches for the mid to long timeframe trades, and single units for the short term income trades, in effect the income trades are single capital tranches but sometimes they convert to capital or hybrid trades. Confused yet, and yes we scale out on capital trades as well.

    If it was easy everyone would make money doing it.
    #10     Apr 13, 2018