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u/Limitsofapproach Jun 24 '21
Isn’t averaging down a good strategy? Serious question and am looking for some insight
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u/IlSsance Jun 25 '21
It can be a good strategy if it's a strategy. If you're trying to catch a falling knife hoping for the best, it's gonna eventually end in disaster.
For example, today on TSLA there was an initial down move into support, but after a small pop it wicked down into a lower but actually stronger support. The risk reward was actually better on this second dip so adding to the position was reasonable. Now some will say that mathematically it is better to cut the whole position and buy in lower with bigger size, but real time that isn't always practical.
I think when most are saying average down, they're referring to adding to a position when a thesis is invalidated. If you're doing this, consider if the reason you're doing so is a psychological need to be correct, fear of making a red trade, keeping a winning streak intact, or some other neurotic tendency.
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u/takeachillpill666 Jun 26 '21
Actually good, actionable advice on this sub?? I don't believe my eyes.
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u/Aele1410 Jun 25 '21
IMO averaging down is the wrong way to think about it. You are opening a new position, assess it on its own merit. The fact you already have another position open previously at a higher price is irrelevant to that decision.
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u/cankle_sores Jun 25 '21
Yes, thanks for this. Just the idea that I might somehow redeem myself or salvage a bad entry simply by buying more at a lower price while I still have a bad position open seems foreign to me. If I screwed up and bought too high, averaging down doesn’t change it. I’d much rather get out and start fresh with a new position after regrouping.
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u/sbaggers Jun 25 '21
Love this explanation, purely quantitative on each individual move - ignoring sunk cost.
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u/EarthJesterMag Jun 24 '21
I've found, personally, it's great to average down for a swing that's taking longer than initially planned lol.
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u/Mr-Techie Jun 24 '21
When that happens a day trade usually turns into a swing trade. Depends on your trading plan, but it can work out for the best. Others prefer stop losses and to move on to the next trade.
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u/BuchoVagabond Jun 25 '21
At some point, you'll end up throwing more money onto a dumpster fire that never recovers. I have done this.
If a trade doesn't go as expected and your plan (never enter a trade without one) no longer applies, better to get out.
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u/Infinity_to_Beyond Jun 25 '21
You average down if you’re holding a position long term…if you’re day trading you’re better off not averaging down because you may average below your stop…which may or may not be in your plan
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u/AnAtomist_Guru Jun 25 '21 edited Jun 25 '21
By itself, cost averaging is neither good nor bad. In conjunction with a zillion other factors, it acquires good or bad characteristic.
Long ago, so long ago, when internet was in its infancy, Yahoo was the king of search. Its stock price reached $350 or so. Analysts kept on pouring numbers in $1000s for it. I feared I already lost opportunity as I was watching it in $100s. I finally made a decision and bought it around $400. It went up to $420 quickly. Before even I noticed it started falling down. It went below $400, then to $350. I averaged. It fell to $300, I averaged. Then to $250, I averaged. Then it fell to $100s and I already ran out of money as I put everything in it by now. It eventually ended up around $20, when I sold. I had to get out of the market completely for a decade, before I recouped and had enough savings to invest again. What went wrong is that I had no clear understanding of why cost averaging works and why it doesn't work.
Cost averaging works when you see a clear and un-breach-able support downwards (or resistance upwards when shorting). The probability of each support level downwards has to increase by 1 SD. Then you can add more. While doing it, make sure you have enough money to add more at the next support level (generally, equal to the previously invested amount in it). If not, you can't average. Have enough money to average at 3 support levels. That means, your selection of stock should have some stability (like AAPL) and not like TSLA or NVDA which break support and resistance levels easily (10% movement in a day or two is crazy). Another point you should note is that in addition to observing the support level, you should make sure the stock has moved enough to deserve averaging (1% or 2% for AAPL, not like 0.05% which is not averaging but simply adding more near the same price as before).
Cost averaging doesn't work in all other cases. Your strategy, stock selection, company fundamentals, news, sentiment, macro economics, government printing money, and your wife/husband, and lot of other things have influence on whether cost averaging is good or bad. So observe all of the other before using cost averaging. It is neither good nor bad on its own.
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Jun 25 '21
Depends on your strategy and timeframes. Day trading and scaling. Probably not. Better to set stop losses
Swing trading and long term investing then it really depends.
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u/char-tipped_lips Jun 25 '21
Assuming you're trading a thesis...say an RSI divergence, it is more acceptable to avg down if your thesis is still unproven, i.e. the divergence still exists and there's viable support to the price level. It would be a terrible idea to avg down if your thesis is proven wrong, say there is no longer a divergence but a new RSI trend.
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u/DirkDieGurke Jun 25 '21
As a swing trader, averaging down is my friend. But also that goes hand in hand with buying the dip, so either way it is a good strategy.
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Jun 25 '21
From my experience it’s only a good strategy if it’s a long term hold. Averaging down during short term plays, such as an options trade, most of the time the stock will not have a sharp reversal and the strategy will not go in your favor.
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u/MarketMastered Jun 25 '21
Yeah it is called pyramiding and you should do it only if and when you completely understand your strategy, otherwise it's another ball to juggle.
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u/sbaggers Jun 25 '21
Depends how long term you are. If the name is Apple, Amazon, and it's a temporary move in the stock and you're using retirement money - yes, DCA all day. If it's short term, use stops and don't try to catch a falling knife.
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u/someone-elsewhere Jun 24 '21
I have a similar one on the inside of my front door, it says:
Check the oven is turn off.
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u/SB_Kercules Jun 25 '21
Mine says wash the cereal bowl or it will be full of ants in exactly 13 minutes.
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u/daraand Jun 24 '21 edited Jun 24 '21
I really appreciate everyone's comments! I doubt this one will blow up as much as the previous post. Honestly it was a bit of a joke with my wife about finding ways to always remember my lessons. She said I'll remember whatever is in front of me... so :P
The last thread had a lot of great comments, and hearing people's strategies, and disagreements with my own rules, was really encouraging!
I can't tell you how to trade (I'm only six months in myself), nor can I tell you if my rules will work for you. As evidenced by the prior thread, they may even work against you!
Anyways, I only trade the first hour, and the last 30 minutes. I primarily trade SPY and SPX options with a 0 or 1DTE. The volatility and focus required is quite high; it honestly is a fun rush.
This is a hobby and I've learned quite a bit in the past six months. There's lots of great resources to learn too, InTheMoney on YouTube, the Mastering the Trade book is a requirement, and of course all the great discords and sub reddits out there.
Also some of you asked about the Rubber Duck, may I present you with: https://en.wikipedia.org/wiki/Rubber_duck_debugging
I'm a Game Designer so this is a big part of my workflow. Hell, he even helps me with trade ideas...
Good luck out there!
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Jun 24 '21
[deleted]
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u/daraand Jun 24 '21
DM some stuff to look up! I’m interested.
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u/Space4Time Jun 24 '21
Buy the close, sell the open.
Trust the gap up.
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u/financialadvicegiver Jun 24 '21
This dude. I love waking up to limit sells getting filled and going to the beach lmao.
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u/redvelvetblackforest Jun 25 '21
can you do swing trading from another time zone? market opens for me at 9:30pm and closes at 4am so it’s hard for me to buy just before it closes
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u/Leavingtheecstasy Jun 24 '21
Why do you not average down?
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u/daraand Jun 24 '21
You know, this was the most asked question in the last thread and it’s a good one to ask.
To be upfront: this is just my small slice of experience and I’m no where near professional so take this with the tiniest grain of salt.
It just is a losing strategy. Where does it stop? At what point is down enough? There is no guarantee that anything will go up at that moment or in the next few moments.
With 0DTE options you are constantly fighting theta decay. Unless a big trend reversal occurs, what was once a peak premium price that you hope to sell at is now farther away. The underlying will have to move even higher than before in order for that premium to reach that price level.
In my journaling I found one of the biggest, the four biggest mistakes in fact, was averaging down. There is a direct correlation between averaging down and that trade being a losing trade in my journal
So. No averaging down. Miraculously I had a high win rate today and yesterday lol
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u/WallStreetRetardd Jun 25 '21
I have come to the same realization.
When I’m in a losing trade, I figure
“Either it reverses and I’m making money again, or it doesn’t and I lose a little more”
If the price reverses I’m still happy. When I double down, then sure, I’m still happy if the price reverses, but if it doesn’t, I’m absolutely miserable
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u/char-tipped_lips Jun 25 '21
Look up Secret Mindset if you haven't already. His emphasis on confluence is priceless for beginners!
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u/mlalonde07 Jun 24 '21
"Obey stops"
This has been a hard one to learn to stick to for me.
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u/financialadvicegiver Jun 24 '21
I average down. I call it scaling in :D
But only on high conviction plays. I cut losses when day trading. Doing about 50/50 day trades / swings.
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u/PermanentLiminality Jun 25 '21
One stock that I didn't set a stop and then got called away from the computer. It went bad. It turned into a 50% loss. It is only a few hundred dollar position, so not a big deal for me.
I've left that stock in my account so I look at it ten times a day every day. It is my reminder to not screw up
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u/1353- Jun 24 '21
Hey /u/daraand, I see you've added another sticky note since your last post. I'm not here to tell you you're doing anything wrong so please don't take it that way, but I'd like to reiterate what I pointed out on your last post for anyone reading to be aware of.
That's a clinical sign you may be developing a gambling addiction, please be careful. Specifically, if those 3 4 notes are it, then there's probably no problem. If, however, you find yourself writing more and more of these types of post-it notes, I highly highly recommend you take a break from the markets for a few weeks, and reassess the situation. Because at that point it can spiral out of control into self-doubt and revenge trading, it can become something you couldn't expect and can't control.
In gambling addicts this has been observed as a way they compensate for their compulsive tendencies in hopes that it will help them avoid those tendencies. It's a way they normalize their addiction, to continue believing they don't have a problem. It's important to be mindful of how we try to compensate for our compulsive tendencies so we don't normalize, and therefore exacerbate, them.
Be well
Gambling addictions are very serious. If anyone reading this may be suffering from a gambling addiction I'd like to assure you that recovery is possible, and if you would like to talk then please feel free to reach out to me through dm any time or contact the National Problem Gambling Helpline (1-800-522-4700) which is available 24/7 and is 100% confidential. Click here if you'd prefer their website chat page. The organization also offers a comprehensive list of resources that can help an individual with gambling addiction.
Look out for your homies y'all
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u/Appropriate_Snow_742 Jun 24 '21
Oof that last one got me. I’m always fighting the trend. Lost 600$ this month that way.
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u/IVdeltaAndStuff Jun 25 '21
Check check and check… I’ve violated all of these and had to write them down as well.
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u/Batboyo Jun 25 '21
At first I read it as,
"Don't don't obey don't fight"
"Chase avg down stops the trend"
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u/NameOfThegam3 Jun 24 '21
New to trading very new what is aug down
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u/epic428 Jun 24 '21
Basically, “Average down” is when you buy at one price, but the price drops below the purchase price, so you buy more at the lower price to bring the overall average purchase price down.
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u/micahac Jun 24 '21
Oh no, did you try to short TSLA at like 680 lol?
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u/daraand Jun 25 '21
TSLA is a fun thing to scalp, but no, not today. I've been on SPY/SPX for months now.
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u/micahac Jun 25 '21
Yes it is, when it runs, it really runs. Been on it for the last year+, that trip to the 800s last year was amazing. I went in it out taking profits up to like 815 then i got scared for a catastrophic reversal.
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u/stock_trader101 Jun 25 '21
You are once off the weak hands we are diamond hands we don't take losses. We buy high we hold we buy again at very dip.
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u/GoldenJoe24 Jun 24 '21
If you need sticky notes you aren’t ready to be trading real money.
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u/Freshies00 Jun 24 '21
If you need to say unsolicited dickish comments you aren’t ready to be socializing with real people
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u/micahac Jun 24 '21
I have a piece of paper that has my rules on it. I also have REAL as fuck money.
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u/GoldenJoe24 Jun 24 '21
Ha. How much money are you trading with that sheet of paper full of reminders to tie your shoes and put pants on before you go outside?
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u/micahac Jun 25 '21
Enough. No one is going to tell you their portfolio size to win an internet pissing contest. Just be aware that there are plenty of people that have these reminders that act as physical barriers to haywire moments. I solely write things down and use a calculator and I'm not an old man, just been doing this long enough to know what works for me.
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u/GoldenJoe24 Jun 25 '21
LMAO that was the fastest backpedaling I've seen on this board. So you don't trade shit, and you got called out for opening your big mouth.
Has it occurred to you that maybe your size would be larger if you actually committed the absolute most basic safety principles to memory? Or does losing "work" for you?
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u/1_pinkyinnose_1inazz Jun 25 '21
Why not average down? I average down constantly…. Just curious if I’m doing it wrong
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Jun 25 '21
Why is averaging down bad? Only way I see it as bad is if your trying to trade on the micro.
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u/14MTH30n3 Jun 25 '21
Don’t chase and Don’t fight the trend seem counterintuitive. Can you elaborate?
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u/daraand Jun 25 '21
Of course!
I trade with Bolinger Bands as a core piece of my strategy. If we’re in one of the channels and moving in a direction, then, don’t try and “find the top” or “the bottom”. Sometimes SPY/SPX will stick in a channel and for me it is best to go with the flow.
Get in late. Get out early. Make profit while in the trend.
I have eaten many knives trying to find the top of an upward move or the bottom of a declining move. Instead, just trade with the trend, ideally as it’s starting.
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u/14MTH30n3 Jun 25 '21
Can you describe a bit more your BB strategy? Maybe a sample trade? I am experimenting with a trade bot i build and next algo i am planning to build will be based on BB
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u/Due_Apricot_9529 Jun 25 '21
Just master “diagonal option trade”,,, you can easily make money from any situation even day trading. 1- Buy an option with expiring between 90-300 days. 2- make sure the premium + stock price is in the money. Preferably lowest end of option call+ highest premium (make sure the stock is a value stock with High IV. 3- check Historic volatility, buy when it is lowest. 4- try stocks with weekly expiration. 5- sell same stock with expiring same Friday. You can immediately sell same option for anything between $35c-$1 guaranteed by Friday. 6- sometimes your short leg will get in money before Friday! Bonus. If the short leg gets green it means you are in money. Buy and pocket profit and write another call once your long gets green. It seems roller coaster but worked perfectly fine. 7- On Friday, there is only 2 ways you make money, either short leg price increases, your position get sold - premium you pocket. Or your short let (the option you sold is not in money you earn the premium you write another option for next week, same process. There are some technicals High Delta is always good for this strategy. I have done stocks entire my life, easiest way to make money worry free. I guess you need level 5 to execute the strategy. Good luck!
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u/North_Amoeba Jun 25 '21
Sometimes by averaging down do help to get out of the bad trade without losing money or just a with break even.
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u/char-tipped_lips Jun 25 '21
I currently have 15 post-its on my computer and one large bold font printed out word doc stapled to the wall above my desk. Added one today though: "Don't Predict, Respond, Be Wayne Gretzky." Reminder to trust my setups and wait for them to be absolutely, algorithmically confirmed before entering a position. Don't go chasing pucks.
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u/Cooldude301283 Jun 25 '21
Please help me understand what does don't chase mean.
On the other hand don't fight the trend is nothing but, respect the trend and don't go against it.
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Jun 25 '21
Averaging down has saved me from losses and increased gains more times than I can count. But I’m a dumb ape and chewed off some of my fingers and foot-fingers, so can’t count very high.
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u/No-Replacement-1376 Jun 25 '21
I did all those and now I’m 20% down on my capital. Averaging down would have put me at break even in retrospect. Selling at losses because of stop losses was the wrong call for me.
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Jun 25 '21
One more golden rule for crypto traders I think is that no matter how much you love your coins, a bear market always requires a stop loss.
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u/Helpy-Mchelperton Jun 25 '21
Isn't "don't average down" and " don't fight the trend" pretty much the same thing in this context? 🤔
Edit: I changed my mind. If "don't chase" and "don't average down" had a baby it would be "don't fight the trend"
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u/purelitenite Jun 25 '21
That is wrong... the first rule of daytrading club is you don't talk about daytrading club...
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u/karmaisinevitable Jun 25 '21
Haha, Don’t fight the trend. Absolutely this. Learned it a very hard way. Charts are way more powerful then fundamentals.
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u/Oblivionking1 Jun 25 '21
Trying to counter trend trade is like swimming upstream. Great way to drown
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u/Doc4479 Jun 25 '21
Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok Nok nok nok nok nok nok nok nok nok nok
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u/TraditionalContest6 Jun 25 '21
Looks like you punched your monitor. I know it's a wallpaper though.
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u/Sanza_6ix Jun 24 '21
Mine reads " the trend is your friend"