Red Neck, From a personal perspective and experience. It's more reliable to read into a range that is breaking against you than into a trend "acting" as if it's going to "reverse" in your favor. Bottomline, easier to tell when you are wrong when you do it this way; although for many, it could be a matter of preference. I just think that when a trader is averaging down is very important to know when he or she is just dead wrong, as that makes a great deal of difference in overall outcomes. I mostly taught myself so I got a lot of unorthodox preferences.
RTE, Thank You for answering I would say this is an absolute must for all trading / trading strategies - along with - All losses must be kept small relative to net trading capital Me to Sir RN
5 small losses equal1 large loss, only difference is the commissions don't think the size of the loss matters that much, just like the size of the profit doesn't mean much. Big profit makes me feel good, but if doesn't move the account it's just there for looks. I can do it with many small losses and one big win, or many small wins and one big loss. Neither are part of my plan, it just depends on how it turns out.
OT I can take 5, or more - small losses - and never miss a beat I take even one large loss - messes my whole day up... Because I didn't follow my process Commissions don't even factor in - just another CODB ====================================== Remember - I'm not advocating or dissuading RTM Up to each trader to pick his/ her style RN
took a while to get comfortable letting a loss run larger than what I make in a month also very hard not to take a profit which is more than I hope to make in a month but that's not in the plan
You ever bet football? You lose the first two games you bet and you try to get it all back on the third? Don't do that when investing. If a trade goes against you, that means you haven't identified your entry points. If a stock ticks down after your bid gets hit, that doesn't mean it is a losing trade. If there is no negative news in the stock or the marketplace, you have to be patient. There should always be a reason your interested in a stock. Watch, wait, Act.
From the traders I have dealt with, averaging is problematic for two reasons: 1. They invariably give back huge amounts of capital when the mean decides not to revert, and 2. It is just a very painful way to go about life. Way too much emotional trauma and few souls can really effectively deal with it over a career ( or a month sometimes ). You get sucked into numerous modest winners and then you get whacked. You get whacked because you probably are not using the correct timeframes to see the larger trend that just sodomized you, and you get whacked because you are adding and adding because this is really cheap what are these dickheads thinking selling these at this price my God I will buy some more... Oh shit, the close is fifteen minutes away and we are still making new lows.
Since the topic of this thread is averaging down: in an other forum here some days ago I had posted a formula and source code for computing averaging down for any percent rate one wants: http://www.elitetrader.com/vb/showthread.php?s=&postid=3662529