Tired of people downplaying averaging down

Discussion in 'Risk Management' started by No.Heat, Jul 17, 2010.

  1. No.Heat


    First of all, don't generalize there are many ways to profit from the markets.

    My definition of averaging down is adding to a losing trade, not into infinity, that's just idiotic.

    It's interesting that this board and the majority of traders (the 95% losing chunk?) downplay averaging down and since I'm sick of hearing such ignorance here are the building blocks of one of my positive expectancy averaging down strategies.

    If you need mathemathical proof find yourself a mathematician, I'm not your employee just a trader who woke up in a good mood.

    The trick to averaging down is to apply it *only* during consolidated price action and to take the loss if the opposite end of the consolidation changes its characteristic of resistance to support and vice versa.

    Unfortunately, the above, which is common sense is not applied as it should, and that's when people run into trouble due to lack of discipline. They apply it in uptrending or downtrending action, they don't take the loss when the should or they hold for breakouts instead of securing their profits. Consolidation should be treated as such, consolidated, no prediction.

    If the consolidation is spotted in an uptrend then it is wise to only take the side of the trend preceding the consolidation. If there is no trend prior to the consolidation, meaning the data is one big sideways market, you may choose both sides. Assuming a rectangle, make sure your first entry starts above/below the opposite mid side. ie First long, below the mid, first short above the mid.

    Exit opposite end, try to sell on highs and buy lows, higher highs and lower lows even better.

    Key factors: Consolidation scanning research, no overleverage and discipline.

    Apply those factors correctly and you will squeeze profits from the markets.

    No Heat
  2. A lot fresh new traders here on this site and it will take some years before they get to the point of understanding the value of your statement. In the beginning it's all about theory, back testing, and the magic setup. After a couple years you learn that the edges are in position management and synthesizing information in real time. Good traders average down and up. They scale in and out. They fade and follow the trend. You can average down many times as long as you keep the total risk of the position under 1-2%. I have not seen a lot of blow ups on one trade while risking 1%.
  3. henry76


    I might remind you that nearly every very succsessfull trader has blown up atleast once , so trying to avoid blowing up is counter productive , whats more traders like soros and buffet have taken huge postions in thier time , whats more they are experienced enough to kinow there's a risk , but i bet they look at probability rather than reducing risk to , what was it you said? 1-2% , when soros made a billion on black wednesday i bet he was in way over 1-2%.
  4. Been trading over a decade, full time, everyday (almost) and imploy avg up/down as part of a very specific strat that works very very well.

    I'm tired, too, of people making definitive statements about things that they only know a very little bit about. You'll never see me say to another trader that so and so never works or ONLY works in this very specific way. There are FAR too many variables for any one individual to account for and test across years of data.
  5. This sounds like the "channeling stocks" ad. Maybe people make money doing that, seems to me like you'd get stuck in a lot of dead stocks. In any case, you'd be trading for dimes and quarters.

    Ameritrade used to have an Amtd index . . . very informative. Nearly all traders were countertrend . . . they bot losers and sold winners. Bizarrely, they would sell breakouts. I don't understand the psychology of holding a stock during months of consolidation and then selling the breakout, but the Amtd traders would.

    I would guess that most elitetraders (not the successful ones, but the majority) are "faders" . . . they want to sell strong stocks and buy losers. They bought BP on the way down and sold it on the way up. It's a habit that's very hard to break. Even Tudor Jones had to put a sign on his wall saying "losers average losers."
  6. No.Heat


    Never said anything about trading countertrend, in fact I stated what to do if there was a preceding trend before the consolidation and if there is no preceding trend and just consolidation, just exactly which trend am I fading?

    Careful with the "dimes and quarters" statement, my experience has shown that filling my bucket with drops and not splashes is far less messy :)

    No Heat
  7. "Assuming a rectangle, make sure your first entry starts above/below the opposite mid side. ie First long, below the mid, first short above the mid."

    You're trading counter the short term trend . . .
  8. I've experienced success with averaging down & up... As previously stated, it comes down to proper money/risk mgmt and trade mgmt (scaling out/in). Even on yesterday, with the market's decline, I employed avg down with scaling out and was profitable. However, I understand that in trading NOTHING will work all the time. Therefore, proper money/risk mgmt (including appropriate r:r) is CRITICAL!
  9. 1a2b3cppp's journal uses an average down strategy I belive where he buys at all three fib levels, and has a stop at the 100% retracement. Not sure how well its worked for him, but he seems to have made some good trades from it. I personally dont like it because of the added commission cost, but thats not to say it cant work.

  10. I also take issue with the useless "scale in/out" philosophy. If you scale in and average a $45 price, that's the same as buying once at $45. If you're shooting at a deer, hitting one out of five deer is the same as hitting one deer in five shots. Same thing. Maximizing win rate is irrelevant (which is what scaling in/out is trying to accomplish), what matters is the account balance.
    #10     Jul 17, 2010