Here in lies one of the most common rookie mistakes in my opinion. Why trade some choppy index garbage like the above chart, when charts like below give daily opportunities (all from this past week)? You make one good trade a day and you feed your family and fund your retirement. picture hosting
I found the same thing to be true when backtesting simple trend following algos. Signal to noise ratio was the most important consideration. Thanks for the examples.
I think having no capital and being mesmerized by leverage has a lot to do with it. Totally agree with you, equities can offer great ATR, way superior to forex or index futures.
Look... if you are constantly getting stopped out-- the problem won't be solved by averaging down. You need to learn to identify the areas of highest probability... highest profit potential... with lowest risk on the charts. Key areas of supply and demand. There are specific criteria that determines where buyers and sellers exist... in all time frames. Learning the ins and outs of this combined with proper position sizing and risk management are the keys to success. Averaging down is a sure way to blow an account... it is a fools game where one rationalizes that since one cannot determine one support or resistance level from another... the way to overcome is simply continue to add at various levels until one produces a reversal. Absurd. Learn how to trade properly... exit where proven wrong... and then RE-ENTER. Any who have kept themselves from working at Burger King by averaging down have succeeded at doing so by pure luck... probabilities not.
I told you as soon as you mention averaging down all the crazies come out of their books and charts and start telling you why you are wrong some people have a very shallow idea of trading and believe they can foretell the future I treat it like a business and if I am trying to buy inventory I prefer to buy it at better and better prices sometimes I'm right sometimes I'm wrong, but I usually have a decent average price when I'm wrong the setback is horrendous, and that is the risk I am willing to take. Not sure why taking many small losses is preferable to taking one large loss. If you don't understand it, I agree, you shouldn't do it
Here's my point: At some point-- your average down entry FINALLY found a level in which price FINALLY turned. In most cases-- there is not a shred of doubt in my mind that you could go back and look at the charts in multiple time frames... look at the relative strength/weakness from prior close and from the open and compare it to the indexes... determine where supply/demand was on the indexes--- and deduce that you should have NEVER executed your first 2 or 3 entries... that the highest probability level was indeed your last entry. It is asinine to sell the idea of averaging down works-- when you are making mediocre intial entries that clearly have lower probabilities... you should never have entered in the first place initially! Think I'm wrong? Give me your last 5 trades where you averaged down multiple times-- exact time of entries and exits... and I will break it down for you. Without a doubt you will deduce that had you taken a stop loss at a point on the chart where FIRST PROVEN WRONG (which incidentally is the smallest loss).... and then re-entered based on the area on the chart that you identified in advance as the high probability level of a turn-- that your profit would be exponentially higher over time. Oh... the trade turned before it hit that point? BIG DEAL... there are ALWAYS other opportunites... move on... simple as that. However the fact that you had to average down in these scenarios in the first place means that you are indeed looking at the stocks that WILL get to that higher probability level more often than not. And by the way- you said you took 2 $ 10k losses this year. Break it down as a % of your account. Compare it to your average winner. And then provide your win/loss ratio. Let's do the math on the actual impact here. The novice reading this thread is being severely misled. At least oldtimer provides the disclaimer that is the essence of why averaging down is extremely high risk-- I believe his verbiage was that the "setbacks are HORRENDOUS". Horrendous. That is what blows up an account. It's not small losses. If you have an edge-- your probabilities easily negate small losses. Probabilities do not negate catastrophic losses relative to account size... not to mention the psychology impact. The only way... and this is the only way-- that averaging down makes sense from a pure risk perspective- is if you predetermine in advance how many entries maximum you will make... and determine the exact stop loss extreme location where you will be out of the trade in its entirety...IF the stop loss $ amount is equal to your maximum loss that you are risking on EVERY trade. The problem herein however lies with the fact that your profit potential is significantly diminished by the lower position size if price turns well in advance of your planned entries... skewing your profit factor.