This is a great question and there have been many very good responses. For me the Diagrams done by EliteInterest are a work of art and tells the tale (yep, I saved them and I am incorproating them into my trading manual). By scaling into your good trades and cutting the losers while you only have 1/2 or 1/3 of your position on you will probably see your profit margin improve by anywhere from 33% - 50% or so ... and only 33% because you're not eliminating the risk, your just moving it forward into the early quarter/half of the trade! I've just begun using this technique myself for the past month, (as compared to going in with 100% of my position and then scaling out as the trend begins) and I've seen my profitability improve quite a bit, as well as it being much easier for me to enter what looks like a good setup. I have much less to lose if it doesn't go my way so I'm very calm when "pushing the button" (psychology), and I know that I just have to wait for the next setup either later on in the trading session, or over the next couple of days, and I will make back my losses and then some. And finally, because they trade size, this is the technique employed by professionals (who are - hopefully - consistently profitable for their clients). This is no small question, as good money management will make an OK system good, and a good system great! Best Regards, Jimmy
There are lots of psychological reasons to only add to a winner etc but if I assume you are psychologically under control and good at trade execution then I would say scaling in can be a very good thing. Also, I think it must suit the way you think about the market and the market you trade. Personally I divide my traded market into two situations strong and weak trend. When its weak it frequently retraces, when strong not. If strong I buy two units on signal. If weak I scale in at 3 points, just below signal, at the point it gets back to 66% of the time and back at the low timeframe double with my stop for everything just beyond the double. Think of this as trading three systems (1 unit each): - The first one has max risk (but less to stop than that in the strong market because I demand a small retracement) and minimum range to the target (worst profit factor) but I get on almost every time. - The second one has lower risk and better range but 33% of the time I dont get a position. - The third one has very little risk and great range but 70% of the time I dont get a position. Because of the reduced risk I can take 3 units in the "weak" situation so its almost a better trade than buying in the strong situation. I then exit on targets and market conditions.
Speaking strictly theoretically. If you have a method. or technique, that picks entries at the top or bottom of a range, anticipating a reversal, then adding to 'losers' is NOT a bad idea at all. Since there is noise in the market, NO ONE, can predict an absolute price from which a reversal will occur (ok, the big money can predict it, because THEY CAUSE IT) ......... do yourself a favor ,read that 20 or 30 times before moving on. So, you buy 1 unit at the signal . Turns out the contract ticks down a time or two. Well, the signal is stronger now, as the entry is BETTER, so you buy another. This is the reason for scaling in. Now if the signal is WRONG you will lose money. But I thought we said you knew what you were doing. So in the long run, those ADDS will be more profitable then the first entry. This is all very theoretical of course ;-))
Well it's generally inadvisible to pick bottoms or tops... but theoretically, the closer to the 'bottom' or support level, or 'top' or resistance level, depending on if you're long or short, the less initial risk (b/c of support levels) and the higher reward (b/c of greater range up/down). As far as adding on to losing trades... would be very careful b/c if you're wrong you can be really _really_ wrong by being in an even larger position than you would... Personally I'd wait for the retracement to the initial buy point if I didn't get stopped out first.
I think it would probably be best to first define what a losing trade is. For example, some traders may feel that a position that goes even 1 tick against them is a losing trade, while others may feel that they can scale in or average in all the way to a certain level and then only after that level is hit, does it start to be a loser. It may all be a part of a person's plan. So for a trader who is averaging in and will continue to a certain point AND they have related this as a percentage of portfolio, they may feel that they are only adding to a loser after they have totally scaled in and perhaps hit their max loss criteria.
Surely it must depend on what market you are trading. If you daytrade the ES for the last year or two then you can see it has a high probability of reversion to mean, so averaging down is often the best strategy.
I would agree with that . ES is perfect for averaging because I don't think it trends as well as most other markets and returns to normal more quickly. Physical commodities that need quite a bit of time to return to normal supply/demand balance are not as good for averaging---say OJ etc.===
Wrong. You take a position to make a profit. If the trade goes in a loss from the beginning , it is clear that you are a bad trader. You are not able to foresee the right move in the short term; so how can you be able to foresee the right move in the long term? Because by adding up a losing position you pretend to know that the direction will reverse in your advantage. It is a fact that the difficulty to predict the right direction grows exponentially with time. Predicting the right direction for the next 5 minutes is far more easier than for the next week. So if you miss already the 5 minutes, how can you than be right on the week? You cannot, but you tell yourself that everything will be alright at the end.
you are soooo wrong.... "if the trade goes in a loss from the beginning, it is clear that you are a bad trader" DUDE ! think about what you are saying. it shows you are a bad psychic, not trader. LOL ! surfer