Well, I did a quick read of "Reminiscences", and "How to trade in stocks", and both books were good reads.
But, as I was reading, my mind was thinking "Turtles", "Donchian", or in other words "Trend Trading", and not daytrading or scalping, which to me, is a totally different approach to the market, and what I'm more interested in.
So, I did a google and sure enough I found an excerpt from a book where three famous trend followers were mentioned in the same sentence...Ed Seykota, Richard Donchian and Livermore. (see pic)
Livermore says to never risk more than 10% of your account, so obviously this is a different game he's playing. A daytrader wouldn't last long if he risked 10% on a scalp trade. Actually, my 1.5% is probably too much.
You'll see cup patterns and him taking a breakout of the cup. This is really similar to O'Neil's approach but he applies it to a 10 range instead of a daily. So don't discredit those books, there is a lot of information in there. But I referred you to Livermore's book not because of the method but because he has some good trading rules about not adding to a losing position!
I highly recommend the Jeff's thread. It's a good solid approach. I started simming it yesterday. It looks easy but it's not and it'll take a lot of practice. But it's definitely a sound technique.
Not trying to start an argument, and I do appreciate your help, but I didn't really feel I was "adding to a losing position" or "averaging down". I had a stop at $375 or 1.5% of the account. It was just an entry idea to avoid some whipsaws.
You mentioned something about "There are exceptions to this rule but they are for advanced traders only." Would you mind giving an example?
I read that as you have a losing position (-5 ticks) so you buy another, and then do it again when down -10 ticks.
In this example you have a gain of $62.5 in your first trade. In your second example you have a gain of breakeven. In the 3rd example you have a loss of $375.
The problem with this approach is you're quickly in a position where you're risking $375 to gain $0. Even risking $375 to gain $62.5 is bad.
I may be misunderstanding you, if so please clarify. In general you want a reward/risk ratio of at least 0.5 and more preferably 1.0 or above.
To answer your question about exceptions, one exception is if you get another valid setup while you're in a losing position. but this really depends a lot on experience and I don't recommend it. Sometimes I find I'm early, let's say I get 3/5 of my criteria and I enter (per my rules). Then let's say market goes down and now I get 2 more criteria for 5/5. If I would take this trade when I'm flat then I'll take it even though I already have an open position. In my opinion if you have a definite edge and a proven track record, then you can do this.
You may be interested in this thread, it's about trading around S/R levels:
well said. too often traders lower their target objective to get out of a losing trade and keep their risk the same (or worse, increase it). that is emotional trading and no factual evidence or research i've ever seen supports it.
instead the proper thing to do is minimize the risk, not the target objective. if that means you take a full stop here and now as you move the stop up then so be it. anything is better than risking $xxx to gain 0.
"Let us be thankful for the fools. But for them the rest of us could not succeed." - Mark Twain
Yeah, this is a misunderstanding. Obviously, you can't risk $375, if you're only shooting for $62.50.
Think of each unit added as a new trade. On the 1st unit (or trade), we're risking 5 ticks or $62.50, to make $62.50 (or more), a 1-1 trade minimum.
If the market goes down 5 ticks we lost the 1st trade. But, instead of getting out, we add a unit, and now we have 2 units, and our risk is 5 ticks or $125.00 for the 2nd trade. If the market goes up 5 ticks, we've made $125 (1-1 ratio), subtract the loser ($62.50) on the 1st trade, and that leaves us a $62.50 profit.
Now,If the market goes down 5 ticks after our 2nd unit we lost the 2nd trade. But, instead of closing the position, we still believe the market is moving up, so we add one more unit. This is our 3rd trade. If the market goes up 5 ticks we make $187.50, and since we were risking 5 ticks, this is another 1-1 ratio trade.
So, take the $187.50 profit, minus the $62.50 loss on the 1st trade, minus the $125 loss on the 2nd trade, and we're even.
Now, of course, you don't have to get out after the 1-1 ratio is achieved on any of the trades. If you still believe the market will rally to resistance, you can hang on for a larger profit.
But, of course, if the market goes down 5 ticks after the 3rd unit, that's 3 losing trades in a row, so we get out and call it a day, take a break, whatever. But we've only lost $375 or 1.5% of our $25,000 account on this idea. (maybe a better word than trade)
I don't mean to be rude by using the bold lettering, I just wanted make sure you understood I see this as 3 separate distinct trades. I think you may be seeing the idea as one trade, and that was probably my fault for not being more clear.
Anyway, I hope you now see, I'm not risking $375 to make $62.50 or nothing at all. Every trade had a 1-1 ratio (or more, depending on the trader)