what I meant by horrendous is when the loss finally comes it sets me back, unlike the odinary trrader who takes many losses all day long. I got the word from Handle123 who was explaing the way he averages down. And it is a good description. Most of us are use to being underwater, and at times very deep, then when it becomes obvious we are not going to even get back to even we have to take a loss, and even then I average out. for instance, I got on the wrong side of EUR/USD after the QE infinity announcement, and that one trade cost me 20% of my account. But that is hardly a wipeout. But I doubt most would risk 20% on one trade, but if you break it down to all the units I had on it could be looked at as less than 2% per unit.
dont do it! the 2 scenarios that play out-- either A) You average down and the stock comes back to your price and you break even or B) the stock keeps going against you and you lose your shirt not the greatest outcomes.
C the stock turns and you catch a nice profit D you hit your stop loss and forget about the trade,.....for scalpers who can't understand averaging,instead of shorting 1000 shares of stock,at 100 and getting out AT 102,you sell 50 or 100 lots at a time until you reach 1000 shares,your average price would be higher than 100 but you still have the same amount of shares and the same risk parameters,none of this would be necessary if you knew the exact tops and bottoms ahead of time,since that memo never reaches my desk,averaging is preferrable to death by 1000 stops
plus there is some time involved. In many cases the trade falls apart before you ever get a full load on so that is a savings in the loss column. It's a bitch when you buy at the exact bottom and it takes off with just your little itty bitty position on, but I was looking back and I so very rarely buy at the bottom or sell at the top that I can actually remember the few times it has happened and I think about it on a lonely night (just to remind myself I am not always deadwrong.)
. So averaging down is a perfect strategy for losers but averaging up is imperfect for winning? You make no sense
I just recently started using trailing stops to average in on both winners and losers. how it works on winners is obvious but on losers it keeps me from adding until it has at least reversed by my stop amount. this is in addition to just the old traditional add at a limit so every position has a limit to enter and a trailing stop to enter if the limit gets hit I set the first limit out at BE and when the next one hits I set it at the new BE so it scales me out, the last in goes out at BE and the first in goes out at a profit, and the original I never mess with.
Warning: The following addresses a minority niche of trading, and I suspect of little interest to those outside of the niche who understandably don't want to waste their time. However, for the brawlers among you, I'm about to describe most likely what is a minority view on this thread. A minority view sometimes raises hackles. I know that; it just comes with the niche territory. Also, this will be a long post; another reason for not hanging around. "Good trading" to you then. For the rest of you, my essay below is more about understanding the essence of pairs trading (my style for sure, but maybe that of many other pair traders) within the context of the purpose of this thread which is to explain "I ain't averaging down !" The above quote is 2nd post on this thread. It is thinking like that post that I come across occasionally. I don't deride it because intuitively it sure looks like a pairs trader puts on another level to average down. And it is the hardest thing to explain to a non-pairs trader that this is not necessarily true. Opening additional levels is more about a process that occurs at those added levels rather than "attempting to break even." I say not necessarily true because (I repeat) from all appearances it looks like doubling down or whatever you wish to call it. I can only speak to my own experience of pairs trading which may be somewhat unique to other pair traders. (Hmmm... a minority inside of a minority.) I am self taught. I didn't even know anyone else was doing pairs trading the first year I drifted into it. Strangely, when I discovered ET and a great thread in a Journals forum on pairs trading, one that ran for years fairly robustly, I seldom encountered the subject of adding levels. I got the sense from that thread, many are in and out of trades fairly quickly. Others stay in a paired position longer (like me), and this is where the subject of adding layers gets touched, probably because we longer term position holders are more exposed to swings. I infer the lack of addressing the subject as two ways: additional levels consistently work, no big thing, lets move on; or it is an unmitigated disaster and traders want to bury it, not discuss it. I have detected a few times that there ARE unique styles existing in the pairs trading world. So I can't generalize. In four years of trading (rather lightly the last two) I can only remember twice closing an additional layer with a net booked loss. I will explain "net" next. That is all background. The important point I want to make and I understand it is difficult to understand (you have to be there to know what I mean), each level is its own trade, independent of previous levels. Each level experiences dynamics that are only a fainter echo in earlier established levels that I don't touch while trading the most recently established level. There is new rhythm frequently associated with a new level. It is very detectible and relatively easy to take advantage of: I frequently make multiple trades on the additional level, mostly modest ones but consistently successful. When not successful, guess what ? I find myself either in a dead zone for a while after which I can resume trading again on that level, or it eventually crosses the threshold of opening an additional level, or I get blown into a nice gain by favorable winds and I may enjoy closing that level. A third level generally doesn't last long enough to trade too often. It typically is a money maker fairly quickly with--finally--a favorable direction retracement, and I'm back at the second level, surveying for trades. In the end, sometimes I book a loss on the first level that had at one time additional levels above it frequently traded, but hardly ever a loss at the high end (meaning near where the threshold level for where the 2nd level was opened.) Sometimes it is a matter of patience, but I LIKE to think intelligence as to why it is better to book a loss on that first level after doing well on the additional levels, and move on to greener fields. With the exception of the two times I closed out with net loss that included additional level, I seldom just "broke even." It was reasonably better than that or very good results for having made gains on a third level that was seldom or never traded on that level, and multiple booked gains on the second level. Conclusion: My faintly heard cry from the wilderness that "it isn't true, it isn't true that I am averaging down," may now illuminate a few of you that in fact there are additional, practical reasons for adding levels that include enjoying easier to come by, potential, multiple successes that at a minimum attain for the pairs trader the break-even point and beyond. Levels are separate trading platforms from which to trade on, marking time for when the strongly favorable winds finally come along to let that mean be reverted.
Some good input by obvious experienced traders so thank you for taking the time to participate. I think a key consideration is that averaging down works exponentially better in certain market conditions and exponentially worse in others. It's up to the traders to determine the structure of the market in the various time frames at any given point before selecting a money management strategy, as they go hand in hand.