Daniel, I was trying to make a distinction between âadding to a losing positionâ and âadding to a positionâ. Rather badly by the looks of it. Your post does it much better.
averaging down (on losing position) is usually wrong. or let's say, very few people can get away with it. scaling in (down or up), I like and do a lot. it's a way to admit that you aren't God, and don't know how to get the 'best price' once you defined the direction. You let the market tells you what is the fair price. that of course, is almost impossible in ultra short trading and scalping. not all techniques apply to all trading strategies. I realize there is a fine line between avg down and scaling in (down). However the difference is pretty clear : one was not in the plan, the other was. tntneo
Before you average down, you must see if your original reason to enter the trade still exists. Obviously, if you bought a stock on a technical breakout and the stock declines, then you have no reason at all to average down.
The concepts of Averaging Down and Scaling In are not the same. There is a book titled, "You Can't Lose Trading Commodities" that purports the idea of scaling in a long position on the way down to what has been historically a low point. Scaling in is a calculated strategy, one decided ahead of the first entry. Averaging down is a defensive measure taken when the initial trade becomes a loser and rather than cut the loss, the trader rationalizes his position. It is not a calculated strategy, rather it is a reflexive one. It is not planned prior to the first trade and results from not having a planned stop loss. Most of the axioms of trading survive after having been proven time and time again to be true. One of those axioms is, "Do not average down." Do not confuse Scaling In with Averaging Down.
I don't agree that this is or should be a hard and fast rule. I know many top traders that add to losing positions if they feel in that particular trade that it makes good sense. I am not a top trader, but I am doing ok, and I my trading has improved since I decided to add to SOME losing positions.
The worst thing for a trader, particularly a newer trader, is to average down and then come out whole or ahead. This will reinforce in his mind that its ok to average down. All it takes is one time where he can least afford it to have the market continue to go against him and blowout the account. On the other hand, if the trader has more ammo left and the trade looks good, disregarding the open position, and one may add. Again as long as its within account risk limits. Just my 2 cents.
Scaling in when a stock keeps going down is another way of rationalizing averaging down. Both methods can still kick your ass if you're wrong. If the stock is going against you, you shouldn't buy another lot until the first lot is in the money. Otherwise, exit the first lot if your stops are hit. You have to stay disciplined in this market. ____________________________ "He who picks bottoms ends up with smelly finger" Ancient Chinese Rice Trader
I would like to re-emphasize inandlong's above post... planning vs. reacting scaling vs. averaging down If it is a part of your Well thought out plan to scale in on a position that is moving against you with the intent that at some point further down you will STOP your scaling and STOP your loss...then I don't see a problem with it. It is my understanding that Nitro uses planned averaging down...i might be mistaken. If it is a reaction to a BAD trade (trades that are bad are usually ones where you're losing money) where you double down or 1/2 down or whatever....if it is a REACTION where the probability is that you will lose more money... DON'T DO IT! DO NOT TAKE THAT ADDITIONAL TRADE and don't rationalize "well if i double down my chances of coming out even are better...blahblahblah" do not make it "right" in your own mind to do something that has been proven to be wrong when done in the heat of the moment. get out, take a break, and re-evaluate.