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Adding to your position, average down or average up?
I am curious to know the following. For those traders who add to their position after their initial entry, do you add average down or average up?
Average down means price has moved against you (price improvement). Average up means price is moving with your entry (you are making money, but price is now more expensive).
"Let us be thankful for the fools. But for them the rest of us could not succeed." - Mark Twain
Can you help answer these questions from other members on NexusFi?
Personally I like to average up around 1:2 risk reward and then put my stop around break-even. Sometimes this means I sacrifice the profit but if I'm right the pay off is great and pays for a lot of probe trades. Probe trades are ones where I just trying to probe the market to jump on the train. If the market is trending hard I might add on again and have it snowball. This way of trading is very uncomfortable to many people who start out because they always want to be right, don't want to risk anything, and are afraid to give up what they made. The idea is that if the market is trending it'll continue to trend.
Honestly I believe if you're going to trade for a living you should at least test out both averaging up, down, and all in and all out to come to your own conclusions.
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I think you really need to separate if you are buying/selling undervalue/overvalued assets vs gaming the auction process. Both are perfectly legit strategies of course but the risks are different because of the number of bets you are placing.
If you can keep making the same bet, you don't gain anything by averaging a loss instead of using that money on the next bet.
Trading based on valuation doesn't make sense to view as a repeated trials process though. Markets are efficient enough that you can't just wait for the next bet.
It depends on my range for entry. A wider range for entry and I'll work into the trade, averaging down.
I narrower price range for entry and I'll enter light and add as the trade goes my way (averaging up).
I prefer averaging up. Sometimes I may go in with most of my contracts on my initial entry with no
averaging.
Again I say that it depends on the type of trading you do. As a long term trader, you often see the price rise in steps as it successfully passes resistance levels...Often these are opportunities to add to your holdings of these stocks with the previous profits on paper to back you up.
I can imagine the shorter the duration of the trade the more risky this would be.
If a stock were falling in a long term trade I would not add to my position on the fall, falling knives have cut me too often .... however, having said that I have held onto declining stocks for some reason (usually fundamental) accepting that paper loss for a future gain and if I see the turn around and rising again, I may add to the position to take advantage of the lower price or just sit tight fingers crossed with a trailing limit stop-loss to recover some of those losses......but I would never buy on the fall, only on a GOOD recovery.
.... however, having said that I have held onto declining stocks for some reason (usually fundamental) accepting that paper loss for a future gain and if I see the turn around and rising again, I may add to the position to take advantage of the lower price or just sit tight fingers crossed with a trailing limit stop-loss to recover some of those losses......but I would never buy on the fall, only on a GOOD recovery.