The only thing what makes sense, is to average down, when you are in profits and odds change !!! Never let the trade become a open loss, close it all and take the loss, if it goes below your entry price !!! Never add to a position !!! Simple rules, guarantee safe trade / risk managment !!!
Averaging either up or down if leveraged can result in a worse condition. At any rate, averaging up or down increases net risk. Averaging down increases net risk but improves entry price while averaging up increases net risk and hurts average price but benefits from accumulated profits. Instead of averaging up, it may be more effective to buy an OTM call option because you have limited risk. I'm not a fan of either averaging up/down. I sometimes add more size as I become more confident in a trade. I've toyed with an idea of averaging down within limits. For example, let's say I think the market will go down or up. I can buy at market or wait to try to get a better limit fill. If I wait for the limit fill then I often miss the best trades but if I go at market then my entry is poor. So sometimes I'll do both. I'll go to market and then add a few on the limit too. This ensures I get filled while giving me a better price if my entry is poor. The downside is that my max loss is increased. Typically I don't average though, either way. If I weren't trading with much leverage then I'd probably favor to average down (within limits and only long) and buy OTM call options if I wanted to average up.
This seems reasonable to me. Just another way to set stops with a confirmation of price...thats all this is... heHe..do it on the long and the short side at the same time and find your way... eS
Sorry, i think i have misunderstood the word average, it means here to add to a position, right ? Then, i say: You may never average up or down, in other words, never add to a position, once you entered all what you want to risk. The only thing you can do is, close your position partly, if the odds change, or targets got hit. everything else is stupid for an market timer. But Warren Buffett, might have a different approach here. Its dependent on the trading / investment style !!! cheers
Either one can be highly profitable or cause you to blow up. Both are methods; nothing more, nothing less. The key is in knowing how to use each and when.
The main problem with averaging down is not psychologically able to handle a stop loss. One may have been able to get out on a non-averaged positioned. But what about after having scaled in multiple times? Before you know it, facing a stop loss 4 to 10x more than what one is used to is daunting and then the mistake of hoping the whole market will just turn around, hoping and waiting.
B.S. Averaging up is most of the time not a good idea, except if you trade stocks where moves can be very large over the medium term. For short term trading in some markets , averaging down is a good strategy if and only if it's part of the initial plan. You can average down even when that was not part of the plan but you risk taking a big hit and yes blow up your account if you are stupid. Done cautiously and intelligently though it can sometimes be considered, however NOT worth the risk most of the time.