I would like to discuss averaging down

Discussion in 'Risk Management' started by Daring, Sep 1, 2012.

  1. Daring


    In the past I tried trading using fixed stops and many times I went through a painful series of small stops, infamously known in trading circles as death by a thousand stops, particularly when price is chopping, something traders using averaging down would be immune too.

    They say your trading method should be one that you are ok with it psychologically. Personally, I'm not ok with getting stopped over and over again, I rather improve my position as volatility presents opportunity and then decide where and how to close it. If you notice when you get stopped, you not just accepting defeat but you are closing at unfavorable areas.

    I definitely do not advocate averaging down into infinity, I think the emergency stop should be something related to past monthly performance. A trader must live to trade another day/week/month so preservation of capital must be part of the money management plan, even if averaging down.

    I think one of the least talked aspects of trading is that when we take a stop we are taking it at the worst possible area, when it's totally against us and inconvenient for our pockets.

    It is possible to realize one is wrong but wait for the right time to close it, even if it's still a losing trade, at least at places where it is less inconvenient.

    I would like to reach out to other traders that favor averaging down and manage their stops based on price movement and not fixed areas and perhaps share ideas and concepts.

    [to be continued]
  2. Don't the pair traders on this board average down, but call it euphemistically call it something else? was it "levelling" or something?
  3. right, that's all I do all night long is add to losers, but I also add to winners. It wouldn't work for me if I didn't do both, but I am always spread. One big loss is the same as many little losses, I started averaging down when I realized I was geting stopped out at exactly the place I wish I had entered.

    In almost every case averaging down will not turn a loser into a winnner, but it will result in a smaller loss.

    A classic pyramid to me is starting with 4 units, then adding 3 as it moves in your favor, then two then one and that is full load.

    on the loss side it is 4 then 5 then 6 then 7 and that is a full load.

    It's a beautiful thing if the whole pyramid ever starts moving your way.

    I never use stops exept at BE on my winners, but I take losses, sometimes very large losses, much much larger than I ever would have taken when I was using stops.

    The whole idea is to keep working the spread to a better price.

    There's a very fine line between averaging down, and the first cardinal rule I learned and never violated again, "Never spread a loser."
  4. Daring


    Most instruments are too mean reversive for averaging up to make sense, you would need a strong trend for it to work and if you had suspicions of a strong trend developing, it makes better sense to load up before the trend formulates itself.

    The real enemy of the markets in my opinion is not so much trends or reversals, but messy action, the dreaded chop that kills everyone, including the very best.

    Does not take much skills to see turns in price, does take skills to anticipate that such turns cannot be trusted because mush is about to developed, this is where using fixed stops or averaging up can be devastating.
  5. Everyone at some stage of their career averages down... mostly newbies that get overconfident and blow out.

    There are sensible algorithms that greatly mitigate the blow-up risk but require intellect and discipline.

    #1. averaging down inside of a range covered by an options hedge.
    You scalp the oscillations but have insurance on the edges allowing you to close out without blowing out.

    #2. Front loading martingales. Flip flopping near an entry point, fractionally incrementing size, playing for breakouts. Eliminate time lockups and you have the luxury to sit out flat with minimal unrealized losses when volatility is low... Simple High probability break out volatility game.

    Roll up your sleeves and do the math on fractional incrementing. What your looking for is the best formula inside your acceptable loss range that gives you the most realistic opportunities to unwind the trade.
  6. Betting system just delay your losses. The bottomline is what your odds are after considering commissions and bid/ask spreads.
  7. So when do u know when to get out?

    2000/1 tech bubble and 08/09 meltdowns would have blow u out.

    Aa 32 to 6
    Gm to bankrupt

    Ge to 12

  8. dom993


    The better question is: "does your current system has an edge" ? Something that you verified on at least 500 setups, taken systematically, with same entry placement & trade management rules.

    If it has an edge, then you know these losses are the cost of making business. You can also test if averaging down makes any improvement to your system. I have 1 system for which it does, and 1 for which it doesn't.

    Edit: the one system on which averaging down works, it works without having to change the stop size for the initial position. For the add-ons, it boils down to a system variant, with less trades (because of entry further), lower win% but higher reward:risk
  9. Mysteron


    This post reminds me of my experience within the first year of daytrading, during a time of steady losses. Getting stopped out, only to see price reverse in the direction of the trade. Its something we all experience. You have to accept that it will happen sometimes.

    So during a trade the temptation naturally arises not to accept a loss, to hold on and even average down, up to maximum position size/loss of course. Well I tried that approach for a while (but not now) the theory being that due to market uncertainty the initial entry may not be best and that better entries may present themselves as price moves and to build up a maximum position size. Its a gambling strategy, because after all thats what trading is - gambling, assessing the odds and placing a bet.

    The result was that my trading account increased meteorically but with occasional major losses. To win at this game it is necessary to accept risk and therefore losses. Problem was that when successive days of substantial losses occured the psychological impact was not to accept further losses and to continue to hold and to further add to position size, fighting the market only to see more losses occur. It was a viscious cycle with my trading account soaring then falling back, soaring and again falling back.

    Personally I don't favour averaging down. If a trade fails then accept it and instead focus on finding the best entries. In any case always define a maximum risk/loss and stick to it.
  10. dom993


    For the purpose of averaging down you might want to study specifically CT trades taken once price reach the ATR, especially for markets on which the std-dev of TR is reasonably low (since this would be the basis for your stop, most likely)

    Another consideration would be to avoid doing that when volume on the day (at the time of your CT trade) is much higher than the average volume reached at the same time of day.

    Still, the key is to create system with an edge. Backtest & evaluate the results.
    #10     Sep 1, 2012