I been scalping profitably since 1991 and started averaging down 1998, never ever thought it would take me another 7 years to learn how to average down well enough, and for the amount of time to overcome emotions but more importantly to do enough back testing and study of price, almost any time I post I do this, always recommend for others not to do so. I kept at it for the challenge, like climbing some mountain, I got the thrill long ago of being able to do so and now just second habit. But what many don't understand about averaging down, it is not just putting in limits so many ticks below original entry that is involved, it is a total evolution of thousands of hours, it be like putting together a nine foot statue and use one milliliter pieces of clay and you using tweezers to get to the solutions of when and how to apply averaging down. As I have gotten much older now, my filters has increased so probabilities of the past has had to become insanely higher for any system to generate a signal. I require signals based on the past fourteen years to be at least 90% probable before I even consider viable, scores of data to see how price performed tick by tick, my risk management "unit" tossed in and another set of tests to look for improvements. It can get rid of obvious bad setups(less than 90% now that tighter requirements required), will it get rid of three plus losses in a row, no it won't, but what I have learned from cycles, they happen and no amount of testing is going to get rid of losing trades. I use to average down 8 more levels than original entry and getting 3 full loses would take me 2-3 months before getting new equity highs, went back to back testing to find a happy zone to do less but keep 75% of the extra gains so now when there is 2 full losses in a row, and only doing half of the extra entries has bought down recover to 2 weeks. And one of the tests I have repeatedly have done is "where will system be taken to the cleaners", we live in a world where you must have insurance, I always keep on OTM Put options for Black Swan, I trade with 500-1000% more than lowest brokers' margins. So in a very light way, I hedge scalping as well as Long term, yea it hurts a little of profits, but it is the smart way in my thinking. One should never think about the money but think about probabilities instead. Work way past beyond what the 99% do, or you won't be playing at all when you average down. Is it worth it? Jury still out considering how much time I spent in terms of money, but the thrill that I accomplished it, yea it was worth it. Yea, did make me a better chartist, too. And most systems are very robust, any symbol and any timeframe including monthlies if I want to scalp those, price is price overall, little changes for a few cause of decimal point.
Trade management keeps me from a visit to the cleaners. It ALWAYS has to be done with Max stoploss in place. That is, if price reaches it then I am out. Period. And that amount should generally not be more than what I can get back in 1 to 3 trades and less than my max daily loss I will allow. This works but i have to maintain a consistent high win rate. The way I see it is I entered based a a viable premise but I know I have a 40% chance i may have entered too soon. So, if it quickly goes against me but is still out of my SL area (I have to weigh the probability if it will at least trade back to my BE point plus enough to cover commissions on the first entry). If so, I will add thus getting some more contracts at a cheaper price. If not, I get out at a loss. Once I average down the max daily loss comes into focus for that position. Usually that amount is there for a bad day when I cannot seem to get in sync with the market or get caught in an anomaly. Most of the time it just sits there ..in case...and never gets hit because I am usually out long before that point. However, in an averaged down trade I pay more attention to that limit. I do not just average down on any trade. That is paving a road to the cleaners as you call it. Perhaps you have heard of the term selective leadership? That is the context determines the the of leadership employed in a situation. For instance, in a fire the fire chief isn’t going to have a democratic process in play where the fireman vote..etc. He will most likely exercise autocratic leadership and demand obedience. After the emergency when back at the fire station they may discuss and dispute actions taken but during the emergency there is no time for such activities. I use selective averaging down. Not every situation will warrant doing it. It is a judgement call. Yes, it is discretionary.
Investors average down ALOT. Trading is investing but on a much smaller time frame. Think about it. However, an investor is not just going to average down on any trade. He will assess the probabilities or have a system he follows in his averaging down and will, in addition, most likely have a SL in place. If a trader believes in noise in the markets then it is properly best to never average down as his judgement will be clouded and he will mess up more often than not. Thing is, I operate off the premise that there is absolutely NO NOISE in the market. There is a reason for every tick move. That is my W.V. of the markets. Things may appear random but they are not. Most would disagree with me but that is ok. It is just how I view it and that view of course affects my judgement as I am a 100% discretionary trader. Got to go attend to the garden. It is burning daylight. Bye
I share that premise completely, and don't believe in what people call "noise" (at least, I don't share the underlying beliefs they have which make them think of it as "noise"). I don't ever average down, though, myself. I'm not trying to imply that you're wrong to do it, of course! If you can make it pay in the long run, you can make it pay in the long run, and you're certainly not the only person here who can. Most people can't, though (and I'm sure I couldn't).
noise for a daily time frame is a swing trade for the 5 min trader. Noise is ridiculous concept because every tick is printed because of a trade being done.Of course you as a trader may not be able to take advantage of certain moves because they are too small.
"Noise" is a relative concept. For me, it's an environment which produces no tradable signals. For a scalper, it may be a great environment.
if u got what it takes u will figure out everything if not - not really traders beyond help, even though many will disagree with me
what is averaging? it makes sense to average ONLY when the market is not trending-when the market is printing ABCs. if averaging is doubling your position on a move against you then this is sensible only in a ranging type of environment. But what if you do what i did yesterday. there was a move out of a ranging uptrend,and i went long.Did not put a stop. that move was a breakout but then it started slowing down:lot of overlapping bars with deep retracements. At that time i increased my position by ten times;the market retraced to the ema but i got out 6 pips earlier for a good profit. IS THERE A BAD PROFIT The market sometimes is kind to the stupid and ignorant:but charity [by the market] should not be mistaken for a viable trading strategy. However, in the beginning, we all mistake this charity for something else and think we can make living doing stupid things. So should you average? well if you can increase your position by a hundred times...you can but then everyone will call you Goldman Sachs