Not at all. It might be a good decision, just timed improperly. If I am early in a trade, I have no problem adding at a lower price if I still believe the trade is valid. That being said, there are also times where I'll exit almost immediately. But in all cases, I have a plan before I even make the initial trade.
Tell that to the people that bought F at 2 bucks. It all depends on whether you're building a longer term position through accumulation, or you're trading the move. If you're trading the move, then averaging up is "usually" a better play. If you're buiding a long term position then averaging down "can be" a money maker. If you don't know why you're taking a position in the first place, you're going to get your head handed to you regardless of what you do. There are no absolutes! Learned that lesson about 10 years ago. Cost me about 60K. Education, it is expensive. A trader needs many tools in their tool box. A hammer is great for pounding nails. Not so useful for painting a wall. Once you have a few tools, know what the tools are for and their limitations, then you can decide...do I want to pound a nail today, or do I want to paint a wall? Grab the right tool and get to work. Even then, some nails will bend and some paint will streak. Enough metaphors
I believe gold is going to 5K. So I just buy goldstocks, whether they are higher or lower than my average. Wish me luck!
Assuming you add linearly to your position at equal distances. ie. ES strike increments - 1 contract. Averaging down 1 @ 1000 1 @ 995 1 @ 990 1 @ 985 1 @ 980 ====== 5 @ 990 Averaging Up... Pyramiding 1 @ 1000 1 @ 1005 1 @ 1010 1 @ 1015 1 @ 1020 ======= 5 @ 1010 Obviously up or down 50 points. Linear progression keeps your loss/profit = 50% of the move. Now analyze retracements... 2 strikes. Average Down 1 @ 1000 to 1010 = +10 2 @ 997.50 to 1005 = +15 3 @ 995.00 to 1000 = +15 4 @ 992.50 to 995 = +10 5 @ 990.00 to 990 = 0 Averaging up (2 strikes) 1 @ 1000 to 990 = -10 2 @ 1002.50 to 995 = -15 3 @ 1005 to 1000 = -15 4 @ 1007.50 to 1005 = -10 5 @ 1010 to 1010 = 0 With linear incrementing (not doubling and tripling position size) Averaging down provides 4 shots at turning the trade profitable on a 2 strike retracement but you remain time locked and exposed to a 50 point loss. Averaging up you can not let the trade go negative. Consider closing out on the 1st retracement of 1 strike if your at 3 or more contracts. Averaging up (1 strike) 1 @ 1000 to 995 = -5 2 @ 1002.50 @ 1000 = -5 3 @ 1005 @ 1005 = 0 4 @ 1007.50 @ 1010 = +10 5 @ 1010 @ 1015 = +25 In the alternative you may average down your position but only up to 2 times otherwise your 5 point pyramiding loss will exceed 50 points. Pyramiding allows you to front load the risk and keeps you unshackled from being time locked in a position. Just don't scale size and let it turn on you without exiting. Using a combination of both strategies will provide more opportunities to recover a negative position and more opportunities to scale size and profit from a strong directional move. No matter how hard you try you will inevitably hit the 50 point stop loss or worse break from the plan and get blown out. If you plan to trade aggressively using an average up/down strategy consider establishing a covered trading range to absorb 1/2 the hit. Wrap the range using OTM options 10 strikes out.. $2500 is your maximum exposure... size an options position to recover $1250 on a 5 strike move. generally a pair of puts and calls.
start hand charting using market profile,...just learn to fill in the squares, ...dont use any of the trading suggestions that go with it,...except the hi lo and value area...,you will see the market searcjing for support and res and establishing a norm or avg,..your hand will start moving to the next square to fill in before the market gets there and before you can see where its going..you will learn by osmossis..once you've learned that you can quit the mp excercise,but you will have learned with out any deep searching how rythmic the market is, then you can search around the rythm ..using it as a base for your conclusions.....this happens every day,the market is always going to have a past, present, and future price.... unless your lucky or a savant , ...most of your trades will move against you 50% of the time,...by a tick or a point or 5 points,and go your way the same percentage ...as a day trader you must learn to trade these searching ,fits and starts ,or chop,...after a while all the prices just become a range,....now your selling the top of the range or buying the bottom,...depends on market climate,...and covering at the value area,..not the other end of the range,...it might stay in the upper range for 2 hours,...then break and stay in the lower range 2 hours..,then return to the value area...now push that out to the the 8-10 day range,.... they happen often ,...expect a move to last 8 - 10 days, ... bias trade the direction of that trend watching for turns to cover partial and restablish bias at a better price,...play this out for the 8-10 days getting a better avg as you go and booking profits...now move that out to weeks and months and quarters and so on ....you have to look at your entry price and the present price and be aware of your losses,...if you can learn to trade defensively so that your confident that you wont have a big snafu...,you can start to forget about your entry price...your entry price becomes an avg of 2,5,10 trades... and just see the market and see the turns and react, at that point price doesnt matter so much as movement ,as long as its moving in fits and starts,surges and pullbacks you can reach in and out ...make a living...averaging 's not for everybody..but's theres more to it than just building on a winner or a loser..its keeping a short or long position and defending it,pulling in money as the day goes and being in the market with a position when it does move your way ..
I have used both styles of money management with various strategies. Both are valid methods of adding size. Just always remember the edge comes form the original methodology and not the money management. If you dont have a consistent repeatable edge, no amount of money management is going to work within a physiologically acceptable framework.
It also depends if you're an investor or a trader. If you're an investor, and you've bought a chunk of a company, you should be happy to get more at an even cheaper price. If I open a pizza shop, and a week later one next to me sells very cheaply, I'm not going to freak out and sell my shop, I'm going to buy more while it's going so cheaply. I do agree that averaging down on a loser is a mistake, but a lower price does not always mean you're losing, it depends on your time frame and goal.
When one averages up, they make profits when the price continues to move away from the mean. Averaging down, money is made during return to mean. Since most algos/HFTs use RTM, there seems to be a chance that avg down strats could be profitable in today's market. Of course I haven't completed an analysis so I'm not certain, but it seems possible averaging down, properly done, might work.
Averaging down equates to chasing the market. As traders we all need a true yardstick of our capabilities, averaging down creates a false performance reading. By all means take multiple shots at a certain set-up, nothing wrong in that, just make sure that the exits are covering the losses in the long run with a decent risk reward. Get rid of the losing trade before you take another pop. 1:1 is the true ratio, this ratio will tell you everything you need to know about your trading performance. why leave losers/money on the table? Averaging is just a manifestation of fear and greed joining forces to hit a trader where it hurts most.....the pocket.
1. Averaging up is like a call option, without paying all premium upfront. 2. Average up depends on reward compare to risk, and makes sense when reward is huge compared to risk. So it is a risk management tool, and not a compounding tool.