Can scaling/averaging down be a viable trading system?

Discussion in 'Strategy Development' started by gdrew77, Jul 30, 2005.

  1. gdrew77


    July 29, 2005
    My trading story…

    I started trading a $30,000.00 account January of this year. I started the year off trading 2 contracts of the ZN and was being stopped out of everything…down to $29,200. Then I started to think that I’m never going to be exactly right on entry so I started to scale in 2 to 3 times as price ran against me on some trades. Well it worked and I was making profits daily. I more than once strung 10+ days of profit together averaging $300 a day with some $900 and $1400 days thrown in a couple of times. I was on fire.
    On June 21st, 2005, after only 6 months trading the account I was up to $49,800.00. I could see $50,000.00…. Heck.…I’m leaving my job this year. Well by the close of the day I was down to $36,959.00. I had 65 contracts of the ZN by days end blindly selling 2’s then 3’s then 5’s and if IB hadn’t sold me out of 30 contracts I would have kept selling. Thanks IB!
    So then I thought I’m in this far I’ll hold overnight and decide what to do in the morning.
    To make a long story short it was Black Tuesday and Blue Wednesday as I liquidated my entire position by 9:30 the next morning and thank God I did or I would have probably blown up the entire account. $23,400.00 left Gosh Darnitt! I continued to trade the next day cause I make money 9 days out of 10 and I can’t lose my fear to pull the trigger.
    Since my blowup I’m up $200 one day. down $300 the next doing 3 to 6 trades a day. I’m trying stops in the market now…..but seem to always get stopped out. Trying to scale in again but 2 or 3 scale ins and I gotta bail out. I’m trading scared and I must stop for a while. Back to my realtor gig and I’m taking a break.

    Am I doomed to eventual failure with a system that scales in as price goes against me? Is anyone currently successful trading a system that scales in to average a better price. Can a system possibly be developed that includes maximum scale-ins and maximum stop points?
    Why did I blow up? I must develop a system that keeps the inevitable large drawdowns manageable and protects me from myself. Darn, and I thought I had this sh.. figured out.
  2. Cos your risk was out of whack with your account size...
  3. Remiraz


    These type of averaging down is call "Martingale".

    It can never be a viable trading system because there will eventually come a trend long enough to wipe you out.

    Unless you spread your capital per trade in such a way as to be able to average down all the way to 0. In that case, the returns would suck even if you had millions.

    If a stop loss or cut off point is added, the losses for those times are tremendous and will wipe out the small winners u accumulated.

    Bottom line: Martingale sux. :D
  4. it can work under certain circumstances - if you lower your initial position size and your strategy/system is mean reversion in nature, as opposed to trend, momentum/breakout.
  5. I'm even impressed that you still had a $19,800 profit after 6 months of doubling-down trading. :eek:

    When you're wrong, you're out. Period.

  6. Trent


    There is nothing wrong with scaling / averaging down in itself, most of the professional traders I have witnessed in action use it. The point is that it it can work as a part of a good trading plan/strategy but the question you ask in the tittle of this thread implies that you consider it to be a strategy in itself.

    Your problem seems to be a lack of a good strategy and obviously trading far too much size.

    I personally average down as mean reversion in rangebound market or to enter a retracement to position myself in the direction of a trend. Never average down against a trend! The trick obviously is to define when the above mentioned conditions are present.

  7. gdrew77


    Thanks guys. My system trades trendline bounces usind MACD divergences as confirmation. Maybe, for example, I can scale 1 contract into the ZN 3 times maximum every 1.5 points against me with a fixed stop point where I exit the entire position if wrong placed in the market. At least the drawdowns although large will not be devastating. By the way, many trades I do not even scale into and I ride for a small profit. Other trades I only scale in once. I want to protect myself from those moments of irrational behavior when I blindly scale into massive positions way too large for my account size.
  8. Trent, professional is not necessarily synonym of successful. :confused:

    Also the original poster obviously has just arrived into trading. My worst advice to a newbie would be to say that averaging down is not a problem. It is. As a beginner you must accept that you are wrong. If you don't, you'll get burnt sooner or later. Big time.
  9. you have to trade in BOTH directions at the same time in two separate accounts and in varying ratio's in relation to the current price level--------then you can do what you were doing but in both directions simultaneously. This way every one point of movement is an accumulation on one side and a profit on the other----------minute by minute, day after day.

    you must have your two separate accounts cross-margined and co-linked to do this {or up to 8 accounts total for the es if you trade the .00, .25, .50, and .75 levels for one point in both directions at the same time}
  10. gdrew77


    This sounds awesome but I'm still digesting it. So I'm always in the market and accumulating or gaining profit simultaneously. When do I cover?
    #10     Jul 30, 2005