Added risk for added profits. All depends on the stats of your system. My stats show that the added risk is largely compensated by higher profits. I also withdraw profits that are not needed as margin for the size I trade. So even if I would wipe out my account no harm is done as I systematically withdraw profits already for a long time, making the trading account just a small part of my net worth. Only at the start I had a few weeks at higher risk as I had not yet withdrawn profits.
I traded far better in my first month in the market before learning anything, because I had a true fear of the unknown, knew I couldn't calculate the future. Later I read some books and thought I could see the order of the markets, and even the universe, according to the wave theorists who use fibonacci numbers. I wasted years looking for accuracy in the entry. Later after learning kickboxing / mma, and spending years at it, the true nature of competitive combat became obvious. Protect yourself at all time, and attack with low risk. Always be working for a stronger position. It became muscle memory after several dozen rounds with another guy trying to take my head off. Then it finally hit me: It's OK to get punched, but it's not OK to get knocked out!
And that means averaging down. That can go very badly on a longer-term hold. Yer stepping into @volpri territory here.
Not necessarily. You can add to your position to average down the price. Or you close the trade and take the same size (so increase leverage) in a new trade.
How can you average down the price .... without the price going down (if long position)? Buy at 100, price goes to 101 so you buy again. Average price is now 100.50 or higher than initial entry of 100. No?
My answer was incomplete. As I spoke about averaging down it was about a long position. The problem was to recover from a drawdown. So prices are moving in the opposite direction of the trade. If not you cannot have a drawdown. Averaging down makes only sense if long and prices go lower. Averaging up makes only sense if short and prices go higher. So: Long at 100. Price goes against you, so price goes down. So drawdown gets bigger (open PnL). You buy extra at 95, a lower price to average down. Or close the position and wait to buy lower again. Or: Short at 100. Price goes against you, so price goes up. So drawdown gets bigger (open PnL). You sell extra at 105, a higher price to average up. Or close the position and wait to sell higher again.
Agreed. And it's a lesson I've been slow to learn, but after a few blown accounts and relatively large losses, maybe I've learned it now. Never put yourself in a position where the outcome of one single trade or one single day can do great damage to your account. A problem here is that if you have a decent clue about what you're doing, you can get away with averaging down or using fairly large stops most of the time, but once in a blue moon you'll get those improbable moves/events which will crush you.
That's what I thought. I do the opposite. Price goes in my favor, I add (under certain circumstances). Price goes against me, I exit (always).
I always thought averaging down meant adding to a loser regardless of direction (long/short). And averaging up meant adding to a winner, i.e., adding more units on rising prices on a long and vice versa on a short.
That's one of the many problems with the definitions of these words. For me averaging down means make the average (price) go down. For me averaging up means make the average (price) go up. All depends witn what averaging is linked: with the price or the PnL. https://sg.finance.yahoo.com/news/getting-started-averaging-averaging-down-070000569.html