Thoughts on Averaging Down

It’s taboo cuz most people can’t do it. As long as you have clearly defined stop limits before you ever enter the trade and you know how much you can lose, it’s not bad. People get into trouble when they KEEP averaging down and blow their account. As long as you fully understand the nature of what you’re doing, and the risks that come with it, then it’s ok.

Trading With A Small Account

You run into other problems besides PDT rule if you’re trying to do this with a small account. Trading the S&P for example, you can buy 1 contract with $500 margin. Yet say you’re trading SPY, and say for simplicity’s sake it’s at $100 per share. If you wanted to buy 100 shares you already need $10k right there, and that 100 shares would only get you $30 on a 30 cent price retracement. Minus commissions. And if you’re scaling into that 100 shares, you’re going to may multiple commissions which will almost assuredly be more than the $30 profit you make. (Day) Trading stocks requires a much, much larger account size and you still don’t get the margin that you do with futures.

I swing trade stocks with a similar strategy to this. The one thing I like much better about stocks is that you can use selective position sizes (eg. you’re not locked into a minimum size of one contract with its tick sizes) which makes hedging a lot more comfortable. I don’t usually hedge with equal sized positions in either direction because I have a bullish bias over time when it comes to the stock market. Using 2x ETFs makes this even more accessible if you’re not worried about decay over time. I think I mentioned before, the majority of my wealth, including my entire futures trading account, comes from heavily averaging down into the weighted ETFs during the huge drop at the end of 2008. I modified the rules a little during that time, however.

Thoughts on Trading

as with any trading, the wider the range that you are trading the less important slippage is.

If you’re scalping for a few ticks, slippage will ruin you.

If you’re swing trading for 10-50 points, who cares about a tick or two of slippage.

That being said…

The percentage between winners and losers is always the same regardless of the spread of the fib lines.

Remember that if it gets to 62% it has less room to go to get to the 100% than to get to the starting point.

I cannot predict price, I don’t know where it will go. That’s why I average down. If it gets to 62% it probably will go to 100%, but if it doesn’t, I make a lot more money.

Combine with hedging the other way and you can make money regardless of which way price goes. Well, sometimes your wins are reduced a bit, sometimes your big loses are reduced by a lot, and sometimes both sides win, which is awesome. Imagine as price is drawing down to the first 3 fib lines and you’re averaging down, you’re closing out trades for profit on the other side (in another account). I do this more on swing trades with index ETFs in my Scottrade account because I can get more control of position sizes than with futures, but like I said, more on this later when I have more time.