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cost averaging
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cost averaging

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cost averaging

Does anyone know the formula for cost averaging when a trade goes against you to improve your break even point

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  #3 (permalink)
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kctpac View Post
Does anyone know the formula for cost averaging when a trade goes against you to improve your break even point

The general consensus is to not average 'down' and to only average 'up'.

However, if you are swing trading or you have a gigantic account (if trading futures) then I would base it off 2 things:

1. Whether or not you got a new signal to enter and you believe a retrace is eminent.

2. You have reached a certain % of ATR that the market typically moves etc., so more of a regression type model.

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Very old thread, but like everything else, it is all down to context.. Account size, capital, ATR, but more to the point, I am not sure why it is always assumed that this is a non ending process that will go all the way to ruin. It can certainly do, but when done based on order flow levels, and not based on random levels, or every x points or some such, it is not only effective but it also it allows to give "more room" to a trade, which might not react to a level but can do on the following one, and it often can improve the average price to break down a trade in 2 or 3 legs. If there no reason to believe after the 2nd or 3rd leg that the trade should play out, all there is to do is to get out, just as one would once in a trade that doesn't work out.

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bluemele View Post
The general consensus is to not average 'down' and to only average 'up'.

Not true at all. Many successful traders scale in when a trade takes some heat, due to their premise not being entirely invalidated. I personally scalp with limit orders a lot, and scale in if I take some heat as long as I'm not expecting a strong breakout against my position. You can either scale in at fixed point intervals or at a second signal. If I wasn't doing this, I would be losing a lot of money.

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Fully agree with you mangalossi..


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