I have never heard this being discussed before but I have heard and witnessed some traders "defending" their positions. i.e a short trade goes opposite your way several ticks so you sell another contract or 2 with the expectation that it will retreat back to at least a breakeven point.
I tried this a couple times in sim and actually came up with big winners both times. I suppose context is everything here.
Does anybody do this?
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A very bad strategy if you are an active day trader and short term swing/position trader with a humanly sized trading account - and especially if trading for a living with no other sources of income.
This strategy works for Warren buffet of course, and big pension funds or others that receive continuous flows of money from outside clients to dump in the markets; and also only buy from the long side and virtually never sell any share... They will eventually end with big winners, but they will have huge drawdown too in the meanwhile, and they need very deep pockets to do this!
It surely works great for those retail investors that have a stable income each month and from which they dump a fixed percentage in the market. You can keep feeding your positions that way, let's say putting 1000$ in your favorite fund each month no matter the current price: one time you will buy less shares, and one time more with that same fixed $1,000 amount; and eventually after several years you would have build yourself a nice fortune
It all depends on your time frame and objectives from trading of course.
I apply this technique on 30% of my trading capital with which I invest in the dogs of the dow each month, a fixed amount regardless of price. It is just 10 blue chip companies that I follow and invest in.
I reassess the list once per month before dropping the cash, and stop investing in the companies that goes out of the list (very rare) but maintaining the shares I already own in those companies.
Successful people will do what unsuccessful people won't or can't do!
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Also called "averaging down" , "doubling down/scaling-in on a losing trade". Dangerous because without sufficiently trained discipline it can become an extremely bad habit. Then it becomes more like gambling. It makes it seemingly too easy and enticing to break rules and setups or interfere with "money management" performance while trading.
It can only work with unwavering discipline at a planned % of a large account. Say one risks %.01 initially of a million dollar account. Then the day trade turns out south, then one could "double down" at an "analyzed" "support/resistance" level and make back to even or profit at greater than the initial trade's # of contracts. But then one needs to stick to a planned small % loss if after adding to the loser the trade continues to go unfavorably. And that's the part where martingale "addicts" will keep adding to the loser and fall to the temptation of ignoring the stop. One could conceivably fall into the trap of adding too much leverage in an exponential way ending up betting a great portion of the entire account on one or two bad initial trades.
A good warning. Notice how he said he had "relapsed". Once addicted it's hard to shake it. Maybe best if this method was automated. But then again there are plenty of forex MT4 "martingale" EA's out there where most publicly sold EA's are not profitable. Probably best to never try it at all in one's learning phase. Much better at some point to learn to "scale-in" to a winning trade which is opposite of martingale, when more experienced.
A recent high-profile example is Corzine and MFGlobal where under his leadership, the firm continued to increase the leverage of their billions of dollars losing position by using London's re-hypothecation rules until the busted margin could no longer be publicly ignored by the American "regulators" and Corzine had run out of favors and customers' segregated funds were also illegally tampered with, but still had enough political cover-up to get through his hearing and no follow up a year later with MFGlobal bankrupted and dissolved.
Last edited by Cloudy; May 30th, 2013 at 06:56 AM.
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it's outstanding when it works but absolutely an account killer when it doesn't and it only takes a loss or 2 to kill it. try it sim for a while and you will see what i mean. stress level can be extremely elevated trading like that too. never traded like that with real money but i have sim and it only took me about 3 days to figure out the dangers.
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Like others are saying it is one of the worst things you can do as a trader. Trading to a large degree is about developing good habits. Some things work some of the time but does not mean long term they are good habits. This is one of those lines you don't want to cross even if it works at times. My most horrible day trading ever was the result of trying to defend positions. I actually blew out my entire account in one day. I was in a cold sweat and once I got down a certain amount I just could not stop. I remember in the fog at one point knowing I was going to blow out my account but that still did not stop me. At that time I would usually take 3 or 4 trades a day. That day I took over 200.
You may think no way I would ever do something like that but trading can bring out some bad stuff. I am a very careful, methodical, cautious person and I lost complete control. I was depressed for 6 months and did not come back to trading for over a year. So I would say don't do it. Only positive that came out of it is I can still remember that sick feeling when it was all over so it keeps me honest.
"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
Last edited by liquidcci; May 30th, 2013 at 11:53 AM.
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There is absolutely nothing wrong with adding to a position which is in the red, if you manage the risk appropriately and have a reason for doing so that is in line with market sentiment.
However, you cannot call this "defending a position." That would be like a lone soldier with a .22 rifle "defending" his territory against B-52 bombers, F-22s, a few tanks, and an army of about 50,000 that have automatic weapons, grenades, and rocket launchers.
Said another way, you have nothing to defend with. So, better to "go with the flow" and choose the side with the biggest guns.
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