Make haste and get ready for the naysayers. Averaging down is a losing tactic (per most traders and some professional traders). Just the terminology puts folks into hysterics. You might want to call it “scaling in.” Seems like that the latter terminology is a tad bit more palatable. Me....well i just call it what it is “averaging down.” It is adding to a losing position. Throwing good money after bad! And I do it quite often! Now here are a few keepers IMO about trading: First Part: The trader must make a judgement. A trader can and should judge the market using initial probability, initial risk, initial potential reward and take a position based on a premise, that is in turn, based upon a context. However, even then, there is uncertainty. Always has been and always will be. It is just the nature of the beast. We trade in a fog that can never be 100% dissipated. Second Part: Profitable trades. The market will ALWAYS judge your position i.e. the market will judge your judgement. Even if it knows nothing of your position, your hopes, goals, and beliefs. This is where ACTUAL probability, risk, reward CHANGE as the trade unfolds. Just one example among many: if a trader waits for more probability before taking a position then in general he should expect less actual reward. But most novices think higher probability means bigger reward. Why is this belief generally a myth? The market has already moved substantially in his direction upon his taking a position (as he was waiting on confirmation before taking a position) therefore the trade has less reward left (of course there are exceptions). High Probability generally means less reward and can mean greater risk too. For instance, on a strong bull BO in the form of a spike the probability is high for the move to continue at least a little more (i.e. smaller reward). But the risk is greater too. Initial stop loss needs to be at the beginning of the spike. Why? Deep PB’s can take place before that smaller reward is made. In a bull spike if you got bulls driving it up so be aware that the bearish institutions will be trying to make “the move” fail. Bulls have the upper hand but bears may push back hard (hence bigger SL is needed) BEFORE the smaller reward becomes a reality. Remember, the market moves “in moves.” Waxes and Wanes. It is the nature of the beast. Mathematically one can manage their profitable trades to render a decent R:R by monitoring ACTUAL probability, risk, reward as the trade unfolds, AFTER the trader has taken a position. EXIT on decent math. Lock in the paper profit. Enter again if the market continues. Don’t worry about commissions. Brokers gotta eat too. Math is relentless and becomes increasingly more important in the management of a trade than in the entry. Just make sure that mathematically each trade is rendering a profit after commissions are deducted. That is why I will enter and exit multiple times on say a bullish move on a say 5 min chart (but the concept applies across TF’s). I lock in paper profits in a bullish move then look for a drop below my exit and enter again compounding my profits as long as my premise is being proved valid by actual market action. Much more can be wrung out of “a market move” doing this than holding from the beginning of the move to the end. Why? Because any move made is made with gyrations. Money can be squeezed out of those multiple gyrations. Third Part: What to do about positions that are paper losses. This is where quick (if intraday trading 5 min TF) but detailed analysis must be done. Do I add (average down) or do I jettison the position with a loss and look for another opportunity? That decision depends on the larger context in which any classical TA price pattern is forming. For example: market is in a bear trend (larger context) but a bull channel is forming (medium context). Looked at from the larger context the bull channel is simply a bear flag. There is a 75% chance that a successful (by successful I mean a BO WITH follow through) BO of the channel will eventually be south (bull channels should be looked at as bear flags in bear trends with eventual BO likely to be south). That leaves a 25% chance the successful BO of a bull channel in a bear trend (BO with FT) will be north. Now another stat to consider 75% of BO ATTEMPTS of a channel fail. The keyword here is ATTEMPTS. That latter figure is precisely why channels form. In bull channels 75% of BO ATTEMPTS out of the bottom fail (although at some point in time a successful BO south will probably happen.) In bull channels BO ATTEMPTS north also fail more often than not (i.e. 75% of the time they fail even though they succeed to small degree.) However, price trades back into the channel even though the channel is bullish and is indeed bullish because the underlying pressure is upward) Those BO attempts top and bottom failing are precisely what makes the bull channel develop and form. So continuing the above example. Larger context = bear trend. Medium context = bull channel or same as bear flag. Now lets introduce the Immediate price pattern context. Immediate context = wedge top in the top third (or even top 1/2) of the bull channel. So what is a trader to do? I would begin shorting the wedge top and adding to the short as price moves against me (If it does) My losses are getting bigger as time goes by however, the larger context (bearish trend) put odds favoring a price drop back into the channel. And I am adding to a losing entry thus positioning myself for a profitable exit (on less price move when it does begin to move in my favor). Why? The odds favor price will trade back into the channel at least to the bottom of top 1/3 of the channel and most likely to the middle of the channel before BULLS push back hard again. Now the Medium context is, remember, a bull channel or bear flag in the larger context. Also, remember 25% chance that BO attempts north of a bull channel will succeed (BO with FT) and also remember that 75% of BO attempts north or south of a channel fail and price goes back into the channel. All these odds favor price going back into the channel enough for me to make a profit. So, bottom line: if adding to a losing position is supported by the larger, medium, and immediate context then I will add instead of letting myself get stopped out followed by looking for a new entry. A wedge bottom trade in bottom third or bottom half of a channel can also work for a long trade (even with averaging down) in the same larger and medium context mentioned above but with one caveat. Remember, eventual SUCCESSFUL BO favors south. SO, a trader needs to be ”johnny on the spot” to exit and reverse if that were to happen. All this said as part of the immediate context the channel must be broad enough for trading wedge tops and bottoms for at least a min scalp which I consider to be 1 point in ES. That means the channel needs to be at least 4 points wide and more would be better. Part Four: what to do when the market judges my position taken is obviously wrong and the market is obliterating my premise (i.e. my premise formed based upon the contexts mentioned above). There is a 40% chance of this happening even when a trader is very sharp at reading PA and placing trades based upon that read. In other words, I know on any single trade I have a 40% chance that my judgement is wrong and the market does the opposite of what I expect it may do based upon my initial assessment of context and initial probability, risk, and reward. Discipline is doing WHAT you are supposed to do, WHEN your are supposed to do it, HOW you are supposed to do it, and paying attention to detail and doing all this even when you don’t “feel” like doing it. This is true in all of life’s endeavors but in particular in trading. So, what should I do when my assessment and premise of the market has been proven wrong by the market. There is ONLY one thing to and that is EXIT. Take the loss. And if I have the courage go right back in again but this time doing what the market is doing. Better yet double up and go in the new direction and I will very soon make my loss back and be back in profit on a smaller movement than not doubling up. It is actually quite an easy process to get a loss back. The process is simple. When wrong, and the market proves that I am wrong, then Do what I am supposed to do (remember discipline)... accept it ..exit ...and double-up in the new direction. The process is easy and simple. The psychological aspect of doing that is the difficult part. The execution is the difficult part especially when one is looking at the DOM and seeing red..red..numbers in profit/loss. One technique that may help a trader is to hide $$ in profit/loss on the DOM via an option in their platform. Don’t even show points lost or gained or the money will influence your decision making. So hide these and FOCUS ONLY on the charts and the executing of the process as PA unfolds on the chart. Just know the max amount I am willing to lose and keep my SL’s within that max range amount. Since uncertainty is the nature of the markets I have to embrace uncertainty to trade but when clarity does come, I have to act. Because of the uncertainty of market PA any strategies or tactics I use I must factor in an additional element. The market will move for, and against me, as I am waiting to exit with a profit. My goal has to be what the market is actually giving me and not necessarily what I want it to give me. Initial reward/risk and initial probability are fine and are a starting point to placing a trade but ACTUAL risk/reward/probability are far more important if I wish to be a consistent winning profitable trader. What the market does with my position is far more important that what I hope or want it to do with my position.
@volpri The first chapter of your book is done! Very nicely said. I like the part about seeing the trades in the context of the larger timeframe. Also, when wrong, immediately reversing the position and going with the trend. So hard to do...
They were one of several on the NinjaBrokerage list when i purchased lifetime license. The sales rep mentioned that they were soon going to have ACH service so that was the main reason i guess if I had to pick one.