I was reading a journal and the poster when on to describe averaging into losers and of course building huge losses only to close the trade at the worst levels. I know there have been countless threads about this but I can't seem to wrap my head around averaging into winners. Your cost basis goes up and your risk of a pull back taking out all your gains increases with every average up.
It depends what you exactly mean by averaging into winners. Some people scale into trades and for example instead of putting on a position with 1% of capital risk exposure, they might enter say in two stages with 1/2% of capital risk exposure, or something along those lines. Another way what you that might have in mind, is say, they enter with a position size 1% of capital risk exposure, and once it becomes winning trade, then stop is moved to lock in profits, and they might add to it say another half a %, so the position becomes a larger while the capital exposure is still limited. It is good method for trend followers, and obviously better suitable for some instruments than others (you don't want a stock gaping against you). But I understand your logic, of having higher average cost, plus the further away you enter from the beginning of a trend, the closer it is is to the eventual end of trend.
ang,there are a million ways to trade and they go hand in hand with acct size,the jpmorgans ,morganstanleys, ...avg into winners year in/year out first box they avg down, 2nd box they avg up,they make and lose billions,we make and lose 100's.1000's
Look at the horror stories on ET. When a trader blows out an account itâs usually because they average down or let their losers run. Youâll find many who were profitable for months on end taking small profits each day then lose it all in a day or two because they reject what the market is telling them. You reverse that process, add to your winners and take a small loss once the market moves against you. You have many small losses but on the days the market moves in your direction you will have a few large wins. If you can blow out your account averaging down you should be able to increase your account by averaging up. Discipline is the problem. Itâs hard to watch profits turn into small losses then take the same set up the next time it presents its self.
Losers ROTS OF LUCK WITH THAT ONE ............. If you can blow out your account averaging down you should be able to increase your account by averaging up.
Why is that? Averaging in as position moves against you and taking small wins as it recovers, and one day step on a mine and large loss. Averaging up is exactly opposite side of that trade. If averaging down a loser, averaging up must be a winner.
They BOTH can work IF you can design the proper and strict criteria for trade entry/management. Also, once the trade is entered a very structured management method MUST be employed to keep the trade "qualified" until at least the first set of profit targets are tagged out (then you can move to a more basic from of trade management and protective stops). It is much easier imo to average into a qualified already profitable trade. Averaging into a trade that has moved against original entries (scale-in dynamic entry versus a static one price level only entry) can be managed imo within a very small range of price and with a proven backtested strict entry management methodology. I would highly suggest that any dynamic cost basis scale-in style, should ONLY be done by traders that have a lot of profitable trade experience (several years minimum). This style needs to be developed and then employed by a trader that has done the proper analytical research and due diligence. There must be very focused and realistic development time while building the exact criteria and trade management rules for averaging in dynamic entry trade methods. The average in dynamic entry method WILL BE complete suicide for a newbie or yet unproven trader, that does not fully understand all aspects involved with the deployment of this style. I use both styles at different times under different criteria, but I have spent the time needed to develop dynamic entry methods that work within my designed rules and "per trade" risk parameters.
In case you were wondering which side of the argument Paul Tudor Jones (one of the top hedge fund managers ever) is on... http://stephenvita.typepad.com/alchemy/images/paul-tudor-jones-thumb.jpg
Averaging up is a symptom of having understood market behavior. The more price action a trader "understands" - and can thus, predict - averaging up becomes a profitable tool. Most traders don't know whats going on half the time (or less), hence they can't apply it with any reasonable degree of success. Imagine a trader who can successfully predict market movement 60% of the time? Or 70%? Or 80%? Thats where averaging up comes into play. The question then becomes - does such consistency in market movement even exist???? :eek: :eek: :eek:
The laws of physics and momentum apply in stocks as well as nature. My very best trades have been the one's I averaged up into. When I look back in my diary I should have done it on nearly every winning position and swing trade I've eve held. It's more difficult (at least for me) with day trades though. Brandon