Defensive Money Management Explained: First Component Of Averaging Down
By LawrenceUnplanned average down is one of the biggest enemies for traders with limited capital. Planned average down, however, can work and it is much more complex than most people can imagine. Although I do not recommend traders to employ the strategy in their own trading in general, an understand of the concept is useful though for retail traders to peek into the world of alternative trading strategies.
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Comments
“Many traders assume that to average down successfully they need to pick the price extremes correctly to make their average cost better. The truth is that it is not necessary at all.”
Hi Lawrence, thanks for this follow up series and looking forward to more! I’m not sure exactly what you are advocating in the above quoted section and I didn’t want to post the entire part because I understand this is premium.
My experience with this from a scalping point of view was that it did help to fade extremes without confirmation. When I was waiting for confirmation it usually sacrificed too much. I’d be interested to hear your thoughts on that….
With kind regards,
MK
The scenario you mentioned is timing an entry which is different from planned average down. Planned average down strategies focus on the net positive cashflow over time without exact entries and exits. Short term counter-trend strategy needs to fade extreme moves for the added advantage. They are not compatible with each other.
One style cannot be converted to the other unless you use very low leverage with your counter-trend strategy. But we know most daytraders would be unhappy to not putting their bullets to work. =)
In short, fading a series of extremes will not produce a good average cost in general. You need other considerations to make it work.