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peterB

My view on averaging down

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Hi Bearbull traders!

I had a big loss these days beause i was acting irrationaly and to help me out of it i tried to make a picture of what is happening when you average down so you can see how usless technique it is. Actually it is unbelievable that our brain accepts such stupid idea to solve the big problem of being in a bad trade.

I put it into a picture, hopefully it is clear to read.

For the purpose let's pretend we trade a low float stock which price is around $10.

364040668_ScreenShot2019-04-18at20_22_56.thumb.png.1bfe022e2aeac7b2d00b55b6c36bc8d6.png

to me now it is obvious that better exiting and entering another trade is always the better option.

What do you think?

I swear i will never do it again! 🙂

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On 4/18/2019 at 1:30 PM, peterB said:

I swear i will never do it again!

Did you kept your promise? 🤔

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Whoever does this is either an "above average trader" (knows exactly when there's a solid chance it will work) or is just plain nuts..bc it will eventually cause the mother of all griefs if you develop a habit of doing it.

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5 hours ago, Abiel said:

Did you kept your promise? 🤔

yes! so far so good. but i still struggle with exiting a non working trade and not accepting the loss

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Posted (edited)

I do it every now and then if I'm long above the EMA-20, and it moves back to that level. However, you need to calculate how much more you will lose when doing that.

I think the danger happens when people keep averaging down just to be right.

Don't trade to win. 

Trade to make money 🙂

Kasper Jensen

 

Edited by Kasper

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Posted (edited)

Trading somewhat impulsively I did this one or twice and eerily it worked out...I have a rule to not do this ...taking on too much risk is one of the biggest mistakes we can make as aspiring/beginners.

The problem with this approach is that when it becomes something "acceptable" in your trading book and you increase your leverage as you grow your knowledge and PnL..."averaging down or up" can lead to blowing up an account much more easily or in milder form wipe out the gains you made in an entire year or several months.

Avoiding this behavior (for the most part) has helped me keep my psychology intact while I went thru the "learning and paying tuition phase". Individual "blow ups" were never huge as a percentage of my account so left my emotional trading psychology "hurt" but largely intact. I also rarely stopped trading when I took blows. Instead, I trained myself to face the markets head on and learn to trade thru difficult times. So as an added benefit the strategy of "incremental and controlled pain" breeds resilience and over time grows confidence. This only worked bc so far I have managed not to add insult to injury which I know would happen if "averaging down" became an acceptable strategy in my playbook.

Bottom line: exposing yourself to pain is required to grow as a trader (be able to put on more risk and grow your PnL goals) but risking too much too early could (read: will) inflict too much emotional damage that is irreversible and causes a trader to quit. This is why averaging down is a strategy only for advanced traders who are adequately capitalized to take large risk and who can bounce back quickly emotionally...like e.g Andrew.

 

Edited by Marek

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Averaging down is really only best used for long term investing. I highly recommend it to buy index funds as prices are tanking, only at the end of day closing price. Over time you get really nice returns but this is only for long term investing (10-20+ years). It does not work for day trading since you will eventually get in one that destroys your account. 

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