Averaging down can be a very profitable strategy. For some reason, the OP thinks you cannot place a stop-loss, but you can. You don't need to average down into infiniti... Have a plan before you even make the trade. Know ahead of time at what point you will cry uncle, and make sure the uncle point is not when the margin call hits! Averaging up is dangerous in itself as well. You can easily lose any profits you once had when an "averaged up" trade reverses, wiping out any gains from the initial position.
If the stock is trending and you have a clear cut stop, then you could and should be averaging down. But as long as the stock stays within the trend it is safe to take positions until the trend is broken. take a stock that's been between $75-$125 dollars for 6 years straight. If I buy 100 shares at $100, another 100 at $90 and another 100 at $80 then I have an average position of $90 a share with the stock trading at $80. I'm selling at $74.99 risking a $15.01 loss. If I buy 100 shares at $100, another 100 at $110 and another 100 at $120 then I have an average position of $110 a share with the stock trading at $120. Now I have a position above the mean. A reversal back to $100 would result in a $10 loss, but a bounce back to $100 from the $90 average position would be a $10 profit. Anyway I'm rambling, this is all hypothetical, as I said in my intro if a stock is trading in a range don't be scared to average into a losing position if you're exit is set. On the other hand I would be weary to continue buying into a position which is approaching its' highs.
wow...borderline plageriasm, maybe I should read the thread before posting, I pretty much just repeated what most of the earlier posters said. anyway, I share the same opinion.
Averaging up/down takes a proper exit plan. The sample with the stock moving from 90,100,110 to 120 and averaging up is as stupid (unless it is a daytrade not held over night) as averaging down without a predetermined price where you give up on the complete trade (Having determined an absolute exit point means you are clear and aware about the risk and your actions are based on a solid plan). As you lock in more capital into the trade (stimulated solely due to unrealized and therewith non-existing profits) you are increasing the risk regardless how far you are up. Just one bad opening will wake you up unveiling the full content of your trade and it will happen the sooner or the later in case you select it as a strategy with stocks. Now I don't want to say only bad things about averaging in but it should be clearly pointed out that this is an approach for profitable disciplined professionals in order to maximise profits only and not something for the unexperienced to experiment with. A useful plan for averaging up is to always add smaller size than your initial entry had been and the last tranche you added is the first one you should close while all exits should be predetermined but at least closely monitored and managed. In the end every add up is just another trade. About averaging down many good and bad things can be said but keeping it simple it has to be based on a proper entry/exit plan as well and must not become re-action (revenge). You must exactly know in advance at which price you are wrong, admitting defeat and get out with a loss of $xxx sharp.
Averaging down is for people who want to make money from a bad decision. Been there done that. Now I just want to get out of a bad decision quickly instead of prolonging it. Admit an entry was garbage and move on.
If I have no idea about a stock's direction, except that it will maintain a 30 cent range, how do I profitably day trade it? My stop loss is based on an unexpected range expansion.... and this is an equity daytrade, not an option trade. I say "hey this stock will probably stay between 20.20 and 20.50 all day, but I have no idea where it will go between those numbers and how it will gyrate." How do I make money with this info?
You need to have rules for either possibility. For example, lets assume market moved up and you get an order to go long, and assume you know where you want to put your stop. Now right after you get in the trade, market goes down, and say you have 2 contracts. At this point, I am going to discuss and actual trade. So market is now going against you and you see a bunch of red candles. So what I did was set 1 contract target to get me out at BE since I decided this was no longer a good trade, kept my original stop, and set 1 contract for a small profit target that was just below the current recent high. Why did I no longer like the trade: a) I did not get in at a good price to begin with b) I did not wait for a confirmation from my indicator. c) I went in with more contracts than I should have for a weak setup. However, what I could also do was get in at a better price if the market took out 1 of my contracts at BE, if I don't move my stop. So market did get 1 contract out at BE, and then started to go down again. but not enough to give me room to average down. I was also now thinking about killing this trade entirely for a small loss, but decided I am now in the trade, and no longer thinking non emotionally. Once you are in a trade, you are less likely to think correctly than when you got in the trade before money was at risk, so the best thing to do is to honor your targets and stops. Also, you need to be willingly to mentally accept that your trade is going to be a loser before you take the trade. So at this point, I decided to leave both target and stop alone, and price eventually hit my target, and of course went even higher, so I should in fact have either averaged up or gotten back into this trade at a higher price. I eventually did go in once more at even a higher price and again got out with a small profit since we were at the highs of the day, but again this was not a great decision since the market went higher and broke those highs. So, I think you can average in once if you either reduce size and/or planned to do this before your original stop is hit. Also, you can either average up or buy at a higher price if you get another valid signal, and you need to not be afraid when trading with real money.
Averaging down on a stock is very dangerous, but the bigger cap the stock probably the safer it is, until you hit ENE. It depends I suppose. I see no reason why averaging down is bad in SIFs, but you must be ready to take a very painful stop loss. If you find yourself averaging down hard (max position on) more than say twice a year in SIFs, your system is flawed, imo. Averaging down 2 or 3 units is no big deal, as long as your units are manageable. Having 6 units on all the time averaged down is a recipe for disaster. Ideally, you want to have seen what huge edge is in relation to your system. That way you know when throwing in the towel is right regardless of pain. Here is something few do: average down and up. You have 4 units on averaged down, and the market starts it's momentum your way. Put on max units! Of course, all of it has to be founded on a sound statistical basis first.
high probability it will trade 20.35, from either direction,if u sold 40 ,you could add on the way up to .50 ,above .50 ,you may add or cover depends on how the stock has been trending,and where the next res is and if you are still strongly convinced it will return to .. at least .35 and just as strongly convinced it will hit .20,it's also important to know how much you are willing to risk,if your max loss is hit ,your out, if you have only lost say 20% or 30% of that number and if that loss wouldn't hurt you ...you add, if you liked shorting,thought it was overvalued at .50 ,you love shorting at .60..if it goes back to .50 ,you can cover your .60 short for a profit and raise your avg price and leave room to add another short at.60 ,if it gets there again,the market goes thru fits and starts,it's nice if your long when its going up and short when going down, but we all know that's not always the case,trading's not simple, the market's designed to beat you,these rules will keep you safe like a an infant in a highchair,but you weren't designed to stay there.theres a lot more involved in trading than these rules, not everyone has discipline, anymore than every nba player is over 7 feet tall, you need to find your skill set and master it,adding shorts at higher prices or longs at lower prices is a very common strategy ,,if it's not ones style,i don't know why they comment on the subject,doubting they have much to offer...comment not directed at nyob
Depends on your entry technique. If you have a range of support or resistance very close or you have a strong weekly level and you are looking to swing it with the daily trend then I would average into the trade up to the last level. I don't think you can randomly average in, and if you can't enter on support and resistance with precision to the tick then averaging in works well if you are skilled at doing it and you keep your total position size less than 1% of your equity. The downside to averaging up is your average entry prices moves up and you don't allow the market room to move . Hence, it works well if you trail your stop. Averaging up and Down both work well if you know when and how to use it. If you only own a hammer in your toolbox, then everything will look like a nail.