Thoughts on Averaging Down
#11
Posted 29 July 2004 - 12:34 AM
#12
Posted 29 July 2004 - 02:22 AM
#13
Posted 29 July 2004 - 02:26 AM
#14
Posted 29 July 2004 - 07:02 AM
#15
Posted 29 July 2004 - 07:21 AM
cap -- the point of the post was to question that wisdom -- not to say it was wrong but to make people think about it. OFten what's known as conventional wisdom is wrong.40 Bits of Trading Wisdom - Bit #25
Averaging down on a position is like a sinking ship deliberately taking on more water.
As for the Martingale trading system, that relies on having 50/50 odds of winning. You could make the argument that after a 5% decline in the market the odds of a rebound are not 50/50, but higher (due to shorts wanting to lock in profits, whatever). This of course may change the odds.
In roulette each spin of the wheel is completely independent of the prior spin. However in the market today's price (and price change) is somewhat related to yesterday's price and price change so the odds may not be 50/50, and may in fact be in your favor (maybe someone could run the numbers -- or I'll try this weekend). Also since you need an RSI below 30 to even enter the first trade, and then we're assuming another 5% slide, you're talking very oversold and very likely to bounce (unless it crashes, which is very unlikely -- not impossible -- just unlikely).
In short I don't think this system is as dangerous as the Martingale trading system, but that doesn't mean it's not dangerous....
SSB
#16
Posted 29 July 2004 - 07:59 AM
#17
Posted 29 July 2004 - 11:31 AM
#18
Posted 29 July 2004 - 11:42 AM
By the way, I do understand the point about the odds of a reversal increasing as you stretch further into oversold (or overbought conditions). From what I've seen people do, it looks like a better way to play that is to wait for the reversal to occur by setting a buy stop (to enter long) or sell stop (to enter short). This helps somewhat to avoid the falling knife. Then once entered, you still have to manage the trade with appropriate exit orders of course.cap -- the point of the post was to question that wisdom -- not to say it was wrong but to make people think about it. OFten what's known as conventional wisdom is wrong.40 Bits of Trading Wisdom - Bit #25
Averaging down on a position is like a sinking ship deliberately taking on more water.
As for the Martingale trading system, that relies on having 50/50 odds of winning. You could make the argument that after a 5% decline in the market the odds of a rebound are not 50/50, but higher (due to shorts wanting to lock in profits, whatever). This of course may change the odds.
In roulette each spin of the wheel is completely independent of the prior spin. However in the market today's price (and price change) is somewhat related to yesterday's price and price change so the odds may not be 50/50, and may in fact be in your favor (maybe someone could run the numbers -- or I'll try this weekend). Also since you need an RSI below 30 to even enter the first trade, and then we're assuming another 5% slide, you're talking very oversold and very likely to bounce (unless it crashes, which is very unlikely -- not impossible -- just unlikely).
In short I don't think this system is as dangerous as the Martingale trading system, but that doesn't mean it's not dangerous....
SSB
#19
Posted 29 July 2004 - 12:14 PM
#20
Posted 29 July 2004 - 12:25 PM