Which is the better way to trade<?>. Say a stock I like is trading in a price of the 10 area, meaning between variable between 9 and 11. Say I buy in at 10, and later the stock goes to 11. Should I buy more at 11? Or say it goes down to 9. Should I buy in more at 9? If I buy more at 11 and it drops back to 10, then "Maybe" that would be my signal to sell at 10<?>. But if I buy in more at 9, and it drops say to 8, that too would be, or might be a signal to sell at 8. I would lose more in the latter case since I actually averaged down and had to sell more value. But still, in other words, which is the better disciplined method<?>. Hope I explained it well<?>.
I think this really depends on your overall strategy and timeline (are you talking short term or long term trades) for a position. Also when you mention adding to a position are you scaling into a predefined risk % for this trade or are you adding to it?
say you have determined you can risk buying no more than 200 shares of this stock.
1) are you buying 200 at $10 and then wanting to buy more after it goes down or up, increasing your risk%?
2) or are you buying 50-100 shares at $10, seeing what it does and deciding whether or not to buy more after?
in the case of the first scenario (you're maximizing your position right away) I would only ever add to it if it was going in the direction I wanted it to and had some profits from the original position. this is a strategy called "Pyramiding".
on the other hand if you are scaling into your position and the stock price moves down from $10, ask yourself the question; does the premise for entering this trade still hold true? if so then I might say buy some more at a lower price. however when scaling in I personally would not want to have a maximum position on (in this fictitious case being 200 shares) in a trade that is not going my way.
please note this is just me hypothesizing as I do not trade this way personally. hope I might have been some help
The premise is if price starts to trend it'll likely continue to trend. I only like to add on to a trade when it out-preforms my expectations and keeps going. At that point there's no reason to get out of trade and more of a reason to get into a trade. Remember the market can start trending at any given point in time. I don't like to add onto losers because the market can remain irrational longer than I can remain rational.
Last edited by Itchymoku; May 10th, 2015 at 05:21 PM.
I usually am willing to scale in to most of my trades as they're going against me. But I only do it for 2 reasons:
1. I believe my premise is still correct (but maybe I was early/late in entering)
2. I believe scaling in will increase the probability of a successful trade.
If I think scaling in doesn't change the probability, then I usually won't do it since it doesn't add anything to my trade except risk.
In general, I have these 4 things already determined before I scale in:
1. Size of each entry. I make each one small enough that I don't violate my max risk per trade if I am wrong/get stupid.
2. Stop placement. It's usually wide for me, but I try to exit with the loss as soon as I realize that my premise is now wrong. This is more of a catastrophic stop - where I would absolutely, without a doubt be entirely wrong.
3. Entry location. I usually want the scale in entry to be far enough away from the first entry, so that I can exit BE on the first if the market changes. For example, I wouldn't buy 100 shares of a stock at 10, and then buy at 10 again (unless there was some sort of great 2nd signal or something like that)
4. What could the market do that would make me think my premise is wrong before the stop was hit? I like to give this some thought prior to scaling in just so I don't get caught off-guard.
For me, the important thing to remember when scaling in is: I scale in based on logical reasons derived from my trading methodology. I do NOT scale in for emotional reasons like loss aversion, discomfort, thrill seeking, greediness, etc. There are probably millions of ways to scale in, and the above is just my own personal method.
I think adding to winners is good, too, but I'm more of a scalper, so I don't do it much.
I think the answer depends on the question of why you are trading the stock and also what is the momentum of the stock.
For example, if you were trading a leveraged shale oil company as price continued to drop, averaging in from the 20's down to the 10's would have destroyed your investments. If however, you said the company has $5B in book value, and the market is valuing it at $3B because of market mispricing AND you're willing to wait 10 years for the market catch up, then go ahead and keep averaging lower to your hearts content.
Usually, the best way is to wait for the market to decide if it wants to go higher or lower, and then join the party after the decision has been made.