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Let's say my statistics tell me that on my winning trades I have an average MAE of 8 ticks. For this example, let's assume that I am using a 12 tick initial stop.
Why would I not want to add to my position if/when price is trading against my initial entry around the 8-12 tick area with a smaller stop?
Example:
I enter using a buy stop market order on CL @ 75.11, my initial stop is $74.99. Shortly after entry, price is trading around $75.03. Why not add more here with a 4 tick stop? Statistics tell me that this is as far against me as it will go, on average. I add to my position with relatively little more risk, but the upside is potentially much larger.
If you think your initial stop is no good any longer, then why are you still in the trade? Why wait for it to hit your stop? Your stop should be placed in such a way that you know you are wrong if your stop is hit.
On the other hand, if you know your stop is good based on your experience and statistics, why not add more with a small stop (still honoring your initial stop) thus allowing a slight bit more risk, but maximizing your upside much more?
Enter trade with buy stop market order with "ATM Strategy 1", change to "ATM Strategy 2" (add with 4 tick stop) and place a limit order 8 ticks from initial entry, and then manage the exits as I normally would; possibly even look to pull off some of the trade near my original entry. Exits will and should be based on statistics and price action at the time the order is placed.
Ideally, price trades against me enough to fill my additional order, and then moves on like I expected it to move in the first place.
one thing I never do is adding to a loosing position. for me this approach is heading for disaster in day trading. for long term investments (stocks), I sometimes average down.
what I don't mind is adding to a winning position. this is one of my favorite strategies. (like getting a buy signal when I'm already long)
Regarding Sylvester's comments... you (Gary) specified that your average MAE on winning trades was 8 ticks... so this seems like a good approach and a method of price improvement. It seems predicated on the notion that you are facing all manner of traders... the extreme scalpers will likely be selling quickly which will drive the price down within the limits of the characteristics of "wiggle" for this instrument (CL in this case), which "wiggles" a lot.
It also seems reasonable to me to add to the trade as it moves up given that the reason for entering the trade hasn't been negated.
I think you have to figure exactly what percentage of your winning trades hit the second entry point. For example, if your win percentage is 60% and of those 1/3 hit the 8 tick mark, then 20% of the time you will be adding to a winner and 40% of the time you will be adding to a loser. If the average winner is 8 ticks, then you will make 16 ticks 20% of the time or an average of +3.2 ticks, but you will lose an additional 4 ticks 40% of the time or an average of -1.6 ticks. In this example it would net out to +1.6 ticks per trade, which may or may not be worthwhile after commissions and slippage. This would be a ball park break even point.
For a scalper that is in the market only 1-2 minutes on most trades, I think it can make sense to "average down", because we are only talking about a few ticks and you've not adjusted nor will you adjust your initial stop backwards.
The whole argument of whether or not to average down is a fine discussion, but I think we shouldn't lose sight that in this case with regards to CL, you can click the DOM button to go long, and then only seconds later be down a few ticks. If your stats and method show the trade is likely to still be a winner, then to me it makes sense to add with a reduced risk and increased reward. I don't believe you can precisely pick within a few ticks the perfect price to execute a trade. If you wait for the perfect price, you often won't get filled.
So buy in when the signal is there, and then buy more if presented with a good risk/reward scenario to do so that also fits your method.
Not to be confused with "oh no, this trade is going against me, I am going to average down and get out on the next push break even" lol. That is disaster waiting to happen.
Platform: "I trade, therefore, I AM!"; Theme Song: "Atomic Dog!"
Trading: EMD, 6J, ZB
Posts: 796 since Oct 2009
this riddle was turned down on premise as faulty,
there are things that work in academia and in statistics that are "worse practices" in real trading with real money,
even sim101 is real money, which is just as good as cash, for our purposes, because if done in real time, it wastes opportunity and costs us emotionally, just as if it were real money
either way, on has to be certain that the turning point (which is impossible to be consistently certain) is about to happen, just co-incidently within that 12 tick, now remaining 4 ticks of that 12 ticks, so that one can come back to break even and then towards profit.
very few instruments turn on a dime or with such consistency.
ripping the book is often done just to take advantage of know retail customer trading patterns like the one you just described.
adding more with a shorter stop only flushes away more precious trading capital after a bad position.
when bad, let it justify itself or walk away having paid for a lesson you've already learned over and over again
Genreal Geo. S. Patton was thought to have quoted: "I don't like paying (in blood, or lives lost) for real estate twice".
- my defined entry-trigger is triggered yet
- my setup is still valid
- my initial SL is not hit yet
- my targets are not hit yet
that means the whole setup is in action + valid - so i am allowed to enter aditional positions at any place i like to.
i am allowed to enter some ticks better than the trigger was > if price comes back -
this offers a smaller SL like you mentioned - because the initial point of the SL stays fix - not the SL value but the point the SL sits on!
and i am allowed to enter in a running trade wich is in profit some ticks yet, as long as target 1 isnt hit yet
- (i can do this when i missed an entry iE )
for shure you can also try to speculate always for a better price then your initial trigger is.
you dont enter at the trigger but you try to enter some ticks better with a limitorder after the setup is triggered.
this gives you a risk of a run-away-priceaction where you dont get a fill.
that part must be added to thoughts + stats then -> is it worth to try to enter ALWAYs better than the trigger -- how much win-trades you gonna loose because market runs aways without a fill.
this is a part for the stats again.
over all - a valid + powerfull idea if you have a well defined setup.
Help me understand this. Why are you still in the position when it is going against you, but has not yet hit your stop IF you believe the stop is no longer any good?
Because, IF you believe the stop is good, then why wouldn't you add and keep the original stop on your new entry?
I also agree adding to a winning position can be equally rewarding and I do this as well, but often will exit on the pullback and then re-enter with the new buy signal. This suits my trading style and personality well and allows me to reduce risk, take some profit, and then ride the new signal.
So, I will ask you the same question I asked Silvester: Why are you still in the position if you do not believe your stop is any good any more? (Price is trading against you, but has not yet hit your stop)
