The problem is when your biggest loss comes, its gonna be BIG from all the averaging down. Even Warren Buffett makes mistakes and had to cut losses. When i traded the intraday averaging down system on demo, i was hitting profit on about 95% of my trades. The problem comes when that losing trade wipes out all profits.
babak asked about macro's strategy. As explained by him it is a bunch of malarky. There is no advantage to going long in one account and short in another. Except if you were attempting to by pass the old down tick rules. When one accounts goes up the other goes down an equal amount and you are burning commisions. If he is making money the value added part of his strategy would make more money in one account with less commissions. During my years trading in an office I had lots of people make such claims and I won a lot of lunches and dinners calling b.s. I call b.s. now. Some of my very favorites on this theme were. When you are in a range. Buy in one account and sell in the other. Then when you break out of the range cover in the account which was on the wrong side. I heard this argument multiple times.
Let me illustrate one way in which "averaging down" can be a good strategy (ignoring commissions, failure to fill etc just to illustrate the point). Say that contract X is worth buying when it breaks above 100. To allow for normal volatility your stop must be at 90. Your target is (say) 115. So for this trade with a 50% win ratio you win 15 for each 10 you lose. Now, if say it retraces 70% of the breakout 30% of the time then you can place a buy at 93. This trade wins 15+7 for a risk of 10-7. Assume 50% win ratio but even allow that it could be worse than the original trade for those times that the retracement happens (it isnt actually much worse if you use it properly and have done your homework). This is a much better trade. So, you can do the rest of the maths on expectancy etc if you want but my goal was just to give a simple "real world" example where averaging in is a good strategy. I would argue that to buy at the first point and then to average down at the second point can be an excellent strategy and Dr Tharp would not disagree with me
The only way averaging down makes sense to me is if the total position was already considered as one position with staggered entries; that is, you knew you were going to go in piecemeal from the beginning. Those that just throw on extra units just to bring down their avg price and raise their chances of just getting out even are building a habit of one day inviting disaster. In this case, there is no logical reason to connect your first entry with your second; the second entry is only a "good idea" if and only if it stands as a good trade on its own. You can't justify any losing subsequent entry just because it was at a much better price than your first, but that's exactly the reason it's so easy to give into the impulse for adding. But the sooner you can wipe out mentally where your first entry was and not let it impede your outlook for the second, the better; the market doesn't care and nor should you.
Youâre right it has to be planned. I generally have at least two entries, at certain price points, planned before entering the market, if both fail then I will consider reversing my positions.