If he originally saw the possibility of a 6 point gain, was stopped out with a 3 point loss, and waited to reenter at his original price, 3 points of the gain would be lost to cover the original stop loss. And the R:R would drop from 1:2 down to 1:1. Averaging down allows him to recover the old stop loss on the way back up and double the potential point gain now that he has double the contracts -- assuming he is correct in the first attempt. Okay, maybe two attempts. Or something like that... It's similar to scale trading.
And what if the second stop is also hit, 12 points below the initial entry price? Now the trader is sitting on a 21 point loss, versus 3 points in the first scenario (no averaging down). That's 7 times the initial stop! Ouch!
Don’t need to backtest it. It is a losing strategy. Creates multiple consecutive losses. By averaging down I am exiting, with profit, near my original entry along with high win rate. If strong comeback even more.
You mean you are also buying (or shorting) more contracts, when you average down (1, 2, 4, 8, 16, etc...)?
My dear Volpri, I have seen fellow traders lose 20 or 30 times their original stop while using these seemingly harmless averaging down techniques.
With limit down (or up) moves, the market would never give you a chance to bail out at the price you wanted. And next thing you know, you have margin calls coming on all sides.