that makes sense. I've never actually averaged up. I just always read about it. I tried it today in a demo account and realized that it was messing with my stops.
Why not just deal with it like what it is - 2 (or more) different trades. Its maybe the same market but 2 different trades. If you dont make the mistake to count the money and have determined risk, target and stop levels what is hindering you to use your initially planned stop for the first lot you entered and have another stop apropriately chosen for the next lot(s). Point is that you are in a profitable position because after you bought momentum drove you forward confirming your plan. Dont count pennies in case things turn around but celebrate the event of catching a nice runner.
I remember Acrary showing us a simulation showing that profit factor increases when averaging up, and decreases when averaging down. Don't remember where that post is though.
You are pyramiding too soon. In your particular example, you are long at $100. You will pyramid on WEAKNESS only. So you wait until stock hits say $110.. Then if the stock falls back to say $106, you pyramid then, thus giving yourself the 'wiggle room.' This works. Now of course the question is, well how do I determine what price level to pyramid at? That is for you to figure out. The devil is in the details. Good luck.
You need to forget this whole backward-looking irrelevant focus on what you did prior to the current price. The correct position at the current price has NOTHING to do with any trades, NOTHING to do with your current position. The correct position is purely a function of what the future market action is likely to be, and your risk tolerance. "Averaging in" or "Adding to winners" are misnomers that take away the focus on the current and future market outlook. That's what should determine your position size, not what the price did in the past, where you entered, whether you were long or short, or what position size you had on previously. I.e. if bonds are going to skyrocket, the right position is a maximum long position. Doesn't matter if you were short, flat or long; whether you averaged in, pyramided, or just bought once and held. Doesn't matter if you are long a full position that is 20 points offside from 9 months ago. The right position is identical in all cases - maximum long.
Here's a little thought experiment that shows one possible way in which adding to a winning position CAN BE profitable. It begins by assuming that you posess at least one profitable mechanical trading system which captures large trends lasting several months. (If that assumption is not true, you can disregard the rest). Trading 150-day breakouts might be an example of your system. Now here's the trick: we will make this known-profitable system into the add-on trade, the second entry, the "adding to a winning position" trade. How? By also entering sooner, in the same direction. For example your known-profitable system might enter long on a 150-day breakout. Great, that's the add-on trade, the second entry. What's the first entry? How about (enter long at (the 150-day breakout, minus (K * ATR))) ? Plug in a value of K that you are comfortable with, such as "enter K=2 ATR's before the 150-day breakout", and ba-da-bing, you're done. The add-on trade is, by definition, profitable (since it is your known-profitable long term system). The add-on trade benefits you the trader. Whenever the add-on trade is entered, we know for certain that the original entry is in a winning position, in fact we know that it has (profit = K*ATR) when the add-on trade is entered. Voila. We have accomplished the goal of adding onto a winning position, and making the add-ons profitable. I will let you explore the idea of entering the first position K*ATR before the breakout, and the add-on position N*ATR after the breakout. (Previously we had assumed that N=0. Not any more!). Perhaps it is better, more profitable, higher Sharpe etc, when (K=0 and N>0). Perhaps it is better when (K>0 and N=0). Perhaps (K>0 and N>0) are best. Experiment and find out.
Your wrong because you added to your position too soon. You also assumed you were "doubling down" in adding. You only add when in doing so still leaves you enough "wiggle room".
If you're daytrading and you're very strong on chart analysis, it would work to your best advantage to close a long winning position before the pullback, then re-enter the position on the next pivot up (if you're still bullish on the move). I believe a situation where you would add to a winning position is if you're scaling in and you start very small to test the action, see how quickly your offer is taken, whether the volume is increasing in your favor, etc. If your test turns out solid, you would add to the position. Also, I've averaged down very successfully many times, as long as my reason for entering a trade is still valid.