In regards to increasing a position as the stock is on the rise or increasing a position as the stock falls believing a rise is on its way, can both strategies be successful? Many say never to average down. What are your thoughts?
The majority of people are net losers in trading so listening to many of them is worthless. Short answer, yes its a very viable way to make consistent money. Need to be ultra disciplined to do it well. I can't say from a stock trading perspective but index futs it works very well.
Most ppl who "avg down" are those who are "hoping" the market will eventually turn in their direction in hopes of avoiding a loss. Then there are those ppl who see the tell tale signs of a stock, or future, that is getting ready to change direction based on data like increasing or decreasing momentum as it nears a pivot/support/resistance point, or macd diverg, for example. In this case they are NOT "averaging down, but usually considered to be "fading the trend". I employ both tactics of dbl dwn and up when certain price action parameters are met. Lots of experience is needed with these strategies. Novices need not apply. Practice, practice, practice ...Lots of practice
Averaging down is not a good approach in trading. I would suggest pyramiding in as a stock rises, so the added shares is not as large as the original position. I am sure some add in equal amounts, but treat each position as separate trades IMO. Don't let an added position erase all the gains from the original position. The bottom line is P&L; the rest is just opinions.
An S&P pit trader friend of mine tells me averaging down is common practice on the floor. Obviously once in awhile they get annihilated ... it's all about mitigating the damage on those days to keep most of their previous gains.
You shouldn't be completely terrified at the thought of averaging down. If you are going to add-on to a losing position, you have to get rid of the "add-on" very quickly if the market continues to move against you.
Averaging in or out is a superior way to tade.. I would not necessarily double down in a rigid sense. This is a way to get profitable in the short term..i.e. day trading and short term swing trades or obviously you could lose more. I would say that when I am trading I am almost always early.. i.e. the market stretches a little and puts me at a loss... I almost always buy or sell more when it is against me. This strategy is what actually took me into the realm of profits... but I did get my butt handed to me by doing this in the UNG recently.. I continued to average down until I couldn't take it anymore and i was overleveraged..(I DID THIS OVER A PERIOD OF 2 MONTHS THOUGH) you must have a point at which the overall trade is just wrong and you step out. in my experience it is beter to have an actual money amount you are willing to lose... say 5K if you can risk a total of 5K then divide out the share price/futures price and average in accordingly... obvioulsy this is a dynamic system and requires daily monitoring and adjusting.. HOWEVER.. FOR DAY TRADING... DOUBLING AND TRIPLING DOWN HAVE SAVED ME AND MADE ME A LOT OF MONEY OVER THE YEARS SO I AM ALL FOR IT. i ALSO DO NOT USE STOPS! I TYPICALLY DO THE OPPOSITE OF WHAT THE GURUS TELL YOU TO DO..
Step back and take a look at your over all net account. It is comprised of a sequence of average up and average down trades. Pyramiding is safer than averaging down. Reason is simple. You are not locked into a waiting game. At any time you can close out the position at a profit. If you are pyramiding and you let a profitable position go negative. Shame on you.. Don't ever do it again. close out immediately and consider the loss your cost of education. Averaging down is dangerous but can be made to work if you combine with OTM options to wrap a trading range. You need to carefully calculate your add increments and an exit plan. The options Hedge should not make you whole but serves its purpose if it mitigates 2/3 of the blood shed. Problem with Averaging Down is you get locked into a waiting game... You also are exposed to overnight margin requirements if you scale larger than your account balance. Best if you program your computer to manage the positional adds and exits. Human error/interference/waffling is still probably your biggest risk.
As a trader, don't you want to make your money as fast as you can? Averaging up is one way to do this.