Hi, explain to me how adding to a WINNING position is profitable?

I know everyone is all "don't martingale, it's bad, booo, only losers average losers, etc."

htf do you average INTO a winner? It kills your trailing stops.

Go long at 100.

Price is now 105. You are winning! You think this trend is going to run long so you buy another @ 105!

Now your average cost is 102.5.

Why is this bad?

You just killed all your "wiggle room."

If price jiggles a bit down to 102 OH SNAP not only are you stopped, out, but you LOSE MONEY. And of course it WILL jiggle down to 102 on its way to 200.

Had you not averaged into it, you'd still be a) in the trade and b) in the money if it wiggled down to 102. I don't know about you guys but if I bought at 100 and lost money at 102 I'd be pissed.



Now tell me why I'm wrong about this?

 

Honestly, averaging into losers a preset number of times seems way more profitable to me.

A PRESET NUMBER OF TIMES.

Not martingaling until you blow your account.

Averaging down gives you MORE wiggle room. In fact, averaging down lets you profit from "noise" in that wiggle room.


Sigh. Now I'm putting my flame suit on for all the ambiguous, cryptic, fortune cookie replies that sound enlightened but really don't contribute anything that are sure to follow

 

Trades can be considered 1 of 2 types. Traders can generally grouped into 1 of 2 types.

It's mean-reversion vs. trend following.

 

Ok.

 

Hummm...I think I know which I would consider averaging up into...

 

Came pretty easy to me. Whatever got you into the position will probably occur again if you are in a winning position.

By definition trends continue adding to trends is common sense.

 

That's awesome but doesn't explain how to overcome the problem I talked about in my original post.

 

That doesnt sound like a winning trade in my book.

 

He's talking about TWO different strategies.........

Scaling in (multiple buys above support) and adding to a winner (adding on pullbacks)

The fact he says "adding to a loser" tells me he doesn't know what he's doing. It's not a "loser" if your scaling in. Once it breaks support (or whatever you use to enter), its a loser and you should not be adding.......the reason to buy is gone. PA is the key.

If I buy at 20, with support at 18, I'm not going to add below 18, but I might at 19. I don't know why this is so hard for traders to comprehend.

 

It's not a problem because you are only looking at one side of the coin. What happens if the trend continues up well past 105?

It's the risk-return tradeoff.