Yes your average cost is raised but at the same time price has plotted price action you didn't have before. For instance, say you buy below resistance, price breaksout and resistance turns into support, adding now worsens your average cost, but you did not know of this when you bought below resistance. This new information is powerful and valuable and worsening your average cost does not make it any less powerful. Everyone wants to buy at the lows with full buying power and sell at the highs without scaling one share or contract. Unfortunately this only works in dreams and hindsight. NAD
lol @ your relevent username Who cares if price has plotted price action you didn't have before? Can you use that info to predict future price? I can't. Sure R turns to S sometimes, but it also doesn't a lot of the time, too. The ONLY way I can even imagine averging up would work would be if each subsequent addition was smaller than the previous addition, which means you'd have to start with decent size to begin with. Martingaling up would ruin your average cost and a small pullback would wipe all your gains. In the event that price KEPT going up, then you would end up with a sizeable gain. I even saw a dude talking about this on a Forex forum years ago, it was like "one trade to one million dollars" or something. he said if you can pick an absolute bottom you can scale into your long position again and again as it goes up, using your new equity as margin to buy more, and after a certain number of entries, assuming price is still going up you'd have a ton of money. The risk is very small, as it is just the initial position. But the potential payoff is huge assuming market conditions are right. Of course, it's really just if you get lucky or not. Any thoughts on that? I feel like it's almost a test of how big your balls are, will you keep doubling down on a coin flip? The potential payoff is massive, but one wrong guess and you lose all your gains. When do you stop?
$100M you could just ask any bank trader what their limits are. they are all masters of doubling up when things go bad.
Try working this out in a spreadsheet: Averaging up at even intervals: Initial position: Long 2 ES Add Increment: 1 Add Interval: 2 points Trailing stop: N/2 max 2 points. The scaling is manageable and captures contiguous movement without allowing the market to turn against you. An alternative is starting with an initial position of 1 contract but skipping the 1st add increment. You always give back a small loss on the last contract add but gain the opportunity to scale size and let price run without significant risk.
Hmm. Are there many times when there is a run up in price without 2 points of "noise" in the meantime to stop you out? Part of the reason I like to trade long term is it rules out the noise. When I was trying to scalp back in the day, even if I got the direction right (50/50) I would get stopped out by noise.
I gave you a simple example for visuals. Definitely, agree with you that many times instead of resistance turning into support we see a failed breakout otherwise known as the head of a new potential head and shoulders and all hell breaks loose. However, in reality what you do is listen to what you consider severe technical damage (this can only be gathered and determined through years and years of experience) on the opposition before doing any additions, once that damage is witnessed, you are ready to fortify your position, never before. The additions must not be on lesser side, they could be even bigger, you just need individual stops for every add to prevent substantial losses on unexpected pullbacks. There is no better position management system out there and the sooner this is realized the sooner you will move your trading to higher profitability.
Set the increment as you wish, 2 points, 5 points, 10 points Minimum should be 5 x spread. Whatever you set becomes the max pull back the exit routine will absorb before stopping and impacts the quantity of transactions. Really just trying to show you how you can pyramid and scale size without taking on significant risk as long as you adhere to the stops and don't let the sized up position turn against you.
Just so I understand, you're saying start with 2 contracts, and then add 1 contract every X points right? What do you mean trailing stop of N/2? What is N in this example? (what about running this system and averaging down going in the opposite direction at the same time? So like say you're short 2 and then every X points you add one more short... but you're averaging down with long positions at the same time, so that when there's a pull back, your short positions exit trailing stop for a profit AND your averaging down long positions retrace and also exit for a profit)
Does not matter, treat each add like an individual trade, with individual stops, in the meantime, you are letting your previous winners run. At the same time, once you get a signal to add, does not mean you need to add there, you can say, ok time to add, you wait for a retracement, and then you add, with its own intelligent stop, regardless of past entries. Buying low shorting high is great but even more important, is getting the direction correctly.