I think that averaging down is better suited for the long term investor, albeit an individual or a mutual fund buying value. IMO, for trading, taking a small manageable loss is far better than marrying a position and becoming that investor.
It all depends on the ratios used. The temptation is to exponentially add to your position for faster exits. The doubling and tripling down game is where you can get in trouble and easily blow out your account. Adding to your position at fixed intervals in increments equal to your opening position will essentially maintain a position cost/loss of 50% from the initial entry. If you can wait out a 50% retracement you make money. If you hedge with OTM options you can establish a "safe" trading range and add to losing positions as above. You make profits scalping oscillations inside this "safe" range and break even or take a substantially smaller loss at the edges. Try paper trading or running a sim on ES: Open with 1 contract at an even strike price. Add 1 Contract to losers at each strike. Profit Target = 1 strike Max contracts = 10 Trading range = +/- 50 points Max Draw Down = $12500 Options Hedge Buy approx 10 Calls or Puts 15 strikes OTM. (Buy $2500 in options to hedge ) Inside the "safe range" your scalping profits on each 50% + 5 point oscillation. At the edge you take a hit of $12500 on the contracts but make between $10K - $15K on the options. +/- $2500. Lot easier to sleep when your positions are covered
If your position exits for a profit before hitting max drawdown, how much of the profit is eaten away by having bought the OTM options?
Adding to a losing position suggests the trader has no entry edge and without an edge you are screwed.
There is nothing wrong with this as long as you have the right money mangement in place. I've scaled-in using fibs, but I don't do it much, because it adds to trading costs, but here is what it'd look like... Here is a chart of rimm with a fib showing price at its 38.2 at 68.11, then 50% at 67.19, and the 61.8 at 66.05.. If I wanted to risk 3%, then I'd just buy 1% at each level, with one hard stop at say 66.00. If I had 250k (7500 3% risk/ 2500 per trade), id buy 1184 shares at 68.11, 2100 at 67.19, and 50,000 at 66.05 I'd have a total size of 53,284 shares..you'd need 3.4 million+ to pull this off tho, and the cost of the trade would exceed your balance. and my target would be 75.68, so profits would be: *12,514.88 *17,829.00 *481,500.00 total ------------> 511,843.88 aside from added commissions, I'm still only risking 3%
Options are not liquidated upon exit of each trade.. You add and liquidate options as needed to maintain sufficient insurance against blow-ups and to establish your covered "safe" trading range. Worse case they expire worthless and your out $2500 or so in premiums. Best case your contracts exit in profits and the options are liquidated in the money.
About what Fidelity and the rest do with out "retirement" funds. Plus they collect a fee. If they happen to outperfrom the market that is just a "bonus" ! All they do is look at metrics and adjust around them, anyone can do it. They have a bad year probably everyone in that sector has too, so they blame the "market" Its really sick. "Portfolio management" Well, just look at and then further listen to Cramer on "Mad money" its all right there to see..... millions of people following..
I am with you... There is no hard and fast rules regarding averaging up vs averaging down or going all in.. The most important aspect is having a sound trading discilpine,money management and sticking to it.. I have found if you are a fundamental value trader,one is better off averaging down(SCALING IN) as you are typically buying weakness..Obvioulsy you adjust the size of your entries.. When I trade high RS stocks(buy strength) I find it far more effective to go all in and limit losses... Taking a look at ones MAE should make things a little clearer
What are the target profits when you're adding 1 contract each strike? Seems like it would eventually get to the point where the profit target is quite far away (like when you've got 8 contracts on and your BE is over 2 strikes away). I'm assuming you're adding them 1 contract per 5 points that price goes against you.