# Averaging Down for the win?



## havaiana (26 July 2013)

Let me give a basic example of going against what is on every trading 'do not' rule list, averaging down. 

On the left are examples of a pull back scenario, on the right a range trading scenario.
Averaging  down (Bottom examples) Using stops (Top examples). GREEN=entry RED=exit

Obviously if they they go our way the result is the same, win. If we are wrong or timing off the examples in the picture can occur.

A large % of the time you can still catch a good trade if your timing is off and scratch/small win/small loss a trade if you are wrong




Obviously there are the times there is no bounce, so there has to be an uncle point. But i think i overall a good trader will make more averaging than stopping out.

I think if people tried this they would be surprised at the results. I have found that the winning piles up so much it more than makes up for the occasions when the daily stop is smoked

Would just like to add it would probably be better to use a position size much smaller than your usual position size and only average up to, or less than your normal position size

For example if you trade 4 contracts, you could change to average down up to 3 times: 1 + 1 + 2 = 4.

Also a great way to practice trading because you will find you are trying to pick the tops and bottoms on your exits as well as your entries. Instead of exiting because your trade has gone against you x ticks, you exit because you think you are coming to the end of the wave/turn.

Any thoughts?


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## havaiana (26 July 2013)

*Re: Averaging Down for the win??*

Let me just re word this "But i think i overall a good trader will make more averaging than stopping out."

to "But i think i overall a good trader will make more averaging than stopping out, in certain (most) market conditions."

Common sense needs to be implemented, like not doing it through announcements, In areas where there is a level nearby that could have a f load of stops trigger against the direction of your trade etc


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## tech/a (26 July 2013)

*Re: Averaging Down for the win??*



havaiana said:


> Let me give a basic example of going against what is on every trading 'do not' rule list, averaging down.
> 
> On the left are examples of a pull back scenario, on the right a range trading scenario.
> Averaging  down (Bottom examples) Using stops (Top examples). GREEN=entry RED=exit
> ...





*Any thoughts?*

Try it.

I see contracts so your talking futures.


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## havaiana (26 July 2013)

*Re: Averaging Down for the win??*



tech/a said:


> *Any thoughts?*
> 
> Try it.




I'm have been trading YEN and AUD currency futures this way on sim during asian session, so far about 15 days trading, 5-15 trades a day. Daily stop not yet hit (daily stop is less than my largest winning day so far. If I had hit my daily stop on say 3 occasions, would still be comfortably ahead

Win rate > 70%
winning days > 85%
average win larger than average loser (not by a whole lot)
average win day larger than average loss day (this one would not be true long term i suspect)
Also average time in winning trades v losing trades is pretty close


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## kid hustlr (26 July 2013)

*Re: Averaging Down for the win??*

I do know of traders who average down. Only THE BEST traders I know do it. 

I think this concept got touched on in this thread. You need to learn the rules, learn to abide by them, then learn when you can break them.

I think there are a number of caveats to averaging down and like 99% of people shouldn't do it.

Its kind of like selling volatility, it works, until it doesn't.

In my opinion anyone who doesn't have a MASSIVE amount of experience shouldn't be averaging down. ever.


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## Trembling Hand (26 July 2013)

*Re: Averaging Down for the win??*

There is a big difference having your timing out by a few bars on a 1 min chart in FX and Index land than doing it with stocks on an EOD basis which are much more trending.

There is also a BIG dif doing it on sim than doing it with real dosh and $10 a tick X every extra contract.

Having said that I totally agree with you.


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## kid hustlr (26 July 2013)

*Re: Averaging Down for the win??*



Trembling Hand said:


> Having said that I totally agree with you.




lol


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## skc (26 July 2013)

*Re: Averaging Down for the win??*



havaiana said:


> Would just like to add it would probably be better to use a position size much smaller than your usual position size and only average up to, or less than your normal position size
> 
> For example if you trade 4 contracts, you could change to average down up to 3 times: 1 + 1 + 2 = 4.




There is a huge difference between an execute-as-planned phased entry vs the average punter's "I am losing so I'd double down after mortgaging the house" approach. IF moving progressively into a position is your strategy and you are keeping overall risk in check, then there's nothing wrong with it. The only issue of course, is that when you put on that first contract and your position go your way, you are only at 1/4 of the desired size. Do you chase, wait for a pullback or flip the bird to the chart?

I face this everyday with my own pairs trading. I need to decide do I wack the full size on straight up or should I wait for further divergence and put further layers on. I haven't backtested it statistically, but it is very rare that I go into profit straight away on most trades, so a layering-in approach seems sensible. Then again, it always feels like the slower and more conservative I make my entry, the faster the trade goes into profit without me riding it at full size! 



havaiana said:


> Obviously there are the times there is no bounce, so there has to be an *uncle point*. But i think i overall a good trader will make more averaging than stopping out.




What's an Uncle Point?


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## havaiana (26 July 2013)

*Re: Averaging Down for the win??*



kid hustlr said:


> I do know of traders who average down. Only THE BEST traders I know do it.
> 
> I think this concept got touched on in this thread.




Thanks for that, this is exactly what i suspected. Especially for people trading with size, using stops just doesn't seem to make much sense.

It also explains why the market has certain patterns sometimes. Like the puke pattern at the end of a long sustained one way grind in one direction without a retrace.

- - - Updated - - -



Trembling Hand said:


> There is also a BIG dif doing it on sim than doing it with real dosh and $10 a tick X every extra contract.




I have felt so sick i couldn't eat lunch doing it on a mini spot account, so can't imagine what it's like with full contracts


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## havaiana (26 July 2013)

*Re: Averaging Down for the win??*



skc said:


> There is a huge difference between an execute-as-planned phased entry vs the average punter's "I am losing so I'd double down after mortgaging the house" approach. IF moving progressively into a position is your strategy and you are keeping overall risk in check, then there's nothing wrong with it.




Agree 100% all the if/then statements need to be worked out before hand.



skc said:


> The only issue of course, is that when you put on that first contract and your position go your way, you are only at 1/4 of the desired size. Do you chase, wait for a pullback or flip the bird to the chart?




That's where I'm at now, I find it harder to pyramid in than to average down meaning i have larger size on some of  my worst trades and less size on my best ones.



skc said:


> What's an Uncle Point?




The point where you have to cry uncle, or submit to the loss. For me it is when I hit my daily maximum loss.

I do however exit positions at loss if i think they won't come back, i don't try and turn every losing trade into a scratch.

I just try and do it on a bounce in my favour rather than just stop out at x ticks. The only time I hit a stop loss is my daily stop, or before a pre determined level where i think it could run as it is goes through, or before a news release


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## Boggo (26 July 2013)

*Re: Averaging Down for the win??*



kid hustlr said:


> In my opinion anyone who doesn't have a MASSIVE amount of experience shouldn't be averaging down. ever.




You will be lucky to last long enough to get a MASSIVE amount of experience imo, if you do have a massive amount of experience you shouldn't (wouldn't) need to gamble.

Just my


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## Trembling Hand (26 July 2013)

*Re: Averaging Down for the win??*



Boggo said:


> You will be lucky to last long enough to get a MASSIVE amount of experience imo, if you do have a massive amount of experience you shouldn't (wouldn't) need to gamble.
> 
> Just my




Boggo you would be very surprised then at how large futures traders trade. Pretty much spend half the time off side and adding to positions. 

Very uncomfortable.


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## skyQuake (26 July 2013)

*Re: Averaging Down for the win??*



Trembling Hand said:


> Boggo you would be very surprised then at how large futures traders trade. Pretty much spend half the time off side and adding to positions.
> 
> Very uncomfortable.




Have you developed a stomach ulcer yet? 

imo futs chop and mean revert enough for averaging to work.
Stock can be more run-away-and-never-come-back


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## Boggo (26 July 2013)

*Re: Averaging Down for the win??*



Trembling Hand said:


> Boggo you would be very surprised then at how large futures traders trade. Pretty much spend half the time off side and adding to positions.
> 
> Very uncomfortable.




I suspect that they would have either started with a lot of experience or are supervised through an institutionalized  process that would have a calculated final expectation of a positive outcome.

I agree that some of the big boys do it differently but the comments are directed at statements on this forum which would tend to lead me to believe that we are not dealing with an institution of the calibre you may be referring to.

The average punter adopting this process would be unlikely get anything other than a warm fuzzy "I have got this game sussed" feeling which would rapidly dissipate as reality set in.

Just my


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## Trembling Hand (26 July 2013)

*Re: Averaging Down for the win??*



Boggo said:


> I suspect that they would have either started with a lot of experience or are supervised through an institutionalized  process that would have a *calculated final expectation of a positive outcome.*
> 
> I agree that some of the big boys do it differently but the comments are directed at statements on this forum which would tend to lead me to believe that we are not dealing with an institution of the calibre you may be referring to.



Ha I think you would also be surprised at that too!!  but yes no doubt they know what they are doing..... mostly.



Boggo said:


> The average punter adopting this process would be unlikely get anything other than a warm fuzzy "I have got this game sussed" feeling which would rapidly dissipate as reality set in.
> 
> Just my




The other thing Boggo is that as Skyquake and I pointed out EOD stocks behave vastly differently than shorter term Index and FX.

- - - Updated - - -



skyQuake said:


> Have you developed a stomach ulcer yet?




Nah just a heart condition with a drinking ...... well some call it a problem.... I call stress relief.


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## Ves (26 July 2013)

*Re: Averaging Down for the win??*



Trembling Hand said:


> Boggo you would be very surprised then at how large futures traders trade. Pretty much spend half the time off side and adding to positions.
> 
> Very uncomfortable.



Also, just out of curiousity, wouldn't the larger traders have position sizes that are too big to use stop losses in a lot of cases (because of liquidity), so they'd have to unwind them on a more gradual basis, rather than a big dump because an exit position has been reached?


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## kid hustlr (27 July 2013)

*Re: Averaging Down for the win??*



Boggo said:


> I suspect that they would have either started with a lot of experience or are supervised through an institutionalized  process that would have *a calculated final expectation of a positive outcome*.






Trembling Hand said:


> Ha I think you would also be surprised at that too!!  but yes no doubt they know what they are doing..... mostly.




Hehe these made me laugh.

I'm still very early on in the game but I remember asking a couple of questions to a few of the guys about keeping records and knowing there stats. They just looked at me like I'm an idiot.

Then I asked something about basis and cost of carry, almost got laughed out of the joint.


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## bagwan (27 July 2013)

havaiana said:


> Let me give a basic example of going against what is on every trading 'do not' rule list, averaging down.
> 
> On the left are examples of a pull back scenario, on the right a range trading scenario.
> Averaging  down (Bottom examples) Using stops (Top examples). GREEN=entry RED=exit
> ...




market = volatility.
not the standard deviation type, but the up and down type.
a trend in one time frame is volatility in another.
use position sizes 100 times smaller than usual.
don't take a view on market direction.
correlations.


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## waza1960 (27 July 2013)

I've being discretionary trading like this for years .Here's some of my real live trading stats from  a small fx account.

https://www.myfxbook.com/portfolio/mt4-527013/642170


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## boofis (27 July 2013)

All of this seems pretty dependent on what product you trade. A US treasury trader of the biggest size might have anywhere up to 5000 available on the bid to hit into for their trade or to dump into if they really, really had to just get out of a position, so averaging in seems a bit counterproductive. 
But if you have only got 10 contracts across 5 price levels that would be a sweep entry and you've got a 100 contract capability, well you might want to start averaging, no? lol.


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## boofis (27 July 2013)

*Re: Averaging Down for the win??*



havaiana said:


> That's where I'm at now, I find it harder to pyramid in than to average down meaning i have larger size on some of  my worst trades and less size on my best ones.
> 
> 
> I do however exit positions at loss if i think they won't come back, i don't try and turn every losing trade into a scratch.
> ...




Two things: isn't that the exact opposite of what we actually want as traders? Full size on winners and less on losers (just in an ideal world scenario). 
Also, you're pretty adverse to a stop, but not knowing what type of trading you do (assuming directional) isn't a stop in the most basic of senses just a point where the market has given you confirmation you're original trade idea was wrong, so why not choose levels rather than x ticks out of curiosity? 
Have also toyed a few times with placing a double 'stop' one to stop out and one to enter when taking counter trend trades at very touch n go points where I am pretty certain alot of stops will be placed and has worked the couple times for a scalp when I've done it...but I guess that just means my original trade was **** cause my 'stop' was with all the retail stops. 


Also, I'm in the same boat as Kid being new to the game, but my experience has been that i've put on trades and been stopped out to the tick where the trade idea was good and others where it was just plain wrong: both scenarios are very good learning outcomes for a newbie cause you get feedback on whether you entered too soon too late, or whether your trade idea was just rubbish and don't do that again. But without stop, the feedback as a newcomer would honestly just be hope in all situations which is :bad:


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## havaiana (29 July 2013)

*Re: Averaging Down for the win??*



boofis said:


> Two things: isn't that the exact opposite of what we actually want as traders? Full size on winners and less on losers (just in an ideal world scenario).
> Also, you're pretty adverse to a stop, but not knowing what type of trading you do (assuming directional) isn't a stop in the most basic of senses just a point where the market has given you confirmation you're original trade idea was wrong, so why not choose levels rather than x ticks out of curiosity? ...




Yep, i think i just need to average up more as well as averaging down to fix the size discrepancy between the winners and losers. The results have been and are consistently looking pretty good regardless.

I don't like to use levels for stops because I reckon they aren't static and I like to see how price reacts around them before know it's time to start looking for an exit at loss, add and scratch or add and hold. To me the only important thing about levels is the reaction as they approach or break them, if i'm stopping out at them i'm getting out before i know if the trade is good or not.

A couple of people mentioned i'm just trading volatility, i kind of disagree, i love big volatility and big moves. I'm effectively trading against the market moving in straight lines. Range or trend does not matter that much. If you start noting down when big extended one way moves with no bounces occur, most of them are usually predictable enough to avoid most of the time or only attempt to be on the right side of them. Also i'm not advocating risking your account averaging, i'm advocating decreasing postions size by a lot. When i inevitably hit a straight line type market and enter the wrong way i hit my daily stop, it's no big deal. People advocate risking 2% per trade, 2% is more than my max daily stop.


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## havaiana (29 July 2013)

Another thing, averaging creates many many more decisions. To a good trader making good decisions this will increase their edge in my opinion. Obviously to a crap trader it will increase the number of mistakes they make.

Can't remember the exact line but when i did the trial with propex i remember something along the lines of "stop loss orders are lazy"


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## Trembling Hand (29 July 2013)

havaiana said:


> Can't remember the exact line but when i did the trial with propex i remember something along the lines of "stop loss orders are lazy"




They are for sooks.


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## sinner (29 July 2013)

Not all trading days/weeks/months are the same.

Don't mistake riding a current market regime for skill.

Switching strategies along with regime switches is necessary, understand that your drawdowns will be in these periods. If you only have one strategy then your equity has to be able to hold out until the market regime switches back to the one that pays you!

Obviously some markets are more "regime stable" than others, due to fundamental microstructures of the market. I would say stock indices have the highest regime stability, and FX the lowest.


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## skc (29 July 2013)

havaiana said:


> Another thing, averaging creates many many more decisions. To a good trader making good decisions this will increase their edge in my opinion. Obviously to a crap trader it will increase the number of mistakes they make.
> 
> Can't remember the exact line but when i did the trial with propex i remember something along the lines of "stop loss orders are lazy"




The exact line...



> I think reliance on stop orders makes one a lazy punter. That however, does not mean you should trade without a stop in mind.




http://www.propex.net.au/market-education/546-trainee-question-time-using-stops


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## havaiana (30 July 2013)

skc said:


> The exact line...
> 
> 
> 
> http://www.propex.net.au/market-education/546-trainee-question-time-using-stops




Thanks for that. That one was after my time, found the one though:

http://www.propex.net.au/market-education/504-put-a-stop-to-stops

I should have made the distinction actually, although I'm implying i don't use stops, I have a stop entered via bracket order every trade i take. I just move it just far enough from the market that I can work my way out of the position instead of it being hit, but close enough that it is always less than my daily stop, usually much less. Rarely gets hit, only 3 times recently i can think of, twice when some unexpected jawboning went on and another time when i moved it too close to the market when i went to the loo.


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## Trembling Hand (31 July 2013)

havaiana said:


> Rarely gets hit, only 3 times recently i can think of, twice when some unexpected jawboning went on and another time when i moved it too close to the market when i went to the loo.




Well yesterday I spent all of the arvo session in the Hurt locker!!!! Only getting back in the green in the last 30 min.

Was pretty sure the main action for the arvo was going to be up. What I wasn't smart enough to guess was the massive 100 point sweep 10 seconds after my first long entry!

Very uncomfortable day. Only reason I held onto the first entry was the exchange just crapped itself and I couldn't get out. So damage was done. Was a matter of sucking it up and getting on with the rest of the day.

Not the way I like to trade but the market rarely gives you what you want! 




Though I have no idea how you would do that without a large backing.....


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## CanOz (31 July 2013)

TH, those arrows are your executions?


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## skc (31 July 2013)

havaiana said:


> Rarely gets hit, only 3 times recently i can think of, twice when some unexpected jawboning went on and another time when i moved it too close to the market when i went to the loo.




Having a strong bladder is actually an important factor for being a good trader. I change my coffee habits just to make sure I don't have to go around open/close and critical news times (like 11:30am and 2:30pm).

I like this from Guy.



> In trading you have to keep trying different things. For example when fading you can:
> 
> - Fade when momentum starts to drop.
> - *Fade when it looks like the dumbest thing to do.*
> - Average into trades rather than trade at one price.




http://www.propex.net.au/market-education/488-what-is-the-market-trying-to-do


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## CanOz (31 July 2013)

After looking at THs chart, i think a strong stomach is more important...

also, I'm guessing TH, your finding the ETH handy?


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## kid hustlr (31 July 2013)

How about the entry at the low in the afternoon.

propex quotes are making me laugh btw


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## Trembling Hand (31 July 2013)

CanOz said:


> TH, those arrows are your executions?




yeah just estimates as I don't keep records on individual trades and don't get traditional statements... 



CanOz said:


> I'm guessing TH, your finding the ETH handy?



ETH  - whats that?


skc said:


> I like this from Guy.
> 
> 
> > Fade when it looks like the dumbest thing to do.





- - - Updated - - -



kid hustlr said:


> How about the entry at the low in the afternoon.




Freemasons code.


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## CanOz (31 July 2013)

Trembling Hand said:


> ETH  - whats that?




Extended Trading Hours


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## Trembling Hand (31 July 2013)

CanOz said:


> Extended Trading Hours




You talking after hours? No haven't even looked at them. Hopefully never will. If you are talking about the longer Honkers day time. No not really. Feel like I work too much with 6 hours a day. :


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## artist (31 July 2013)

Trembling Hand said:


> the exchange just crapped itself and I couldn't get out.




What does this mean? Communication was down? If so, how did all the ensuing trades take place? I don't understand why you couldn't get out or hedge.


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## kid hustlr (31 July 2013)

This is a REALLY interesting topic in the futures world as far as Im concerned. I'd love to know what percentage of _successful, big traders_ average down. As I stated I think anyone without vast experience shouldn't be doing it, but I get the impression that all the guys with vast experience _are_ doing it haha


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## CanOz (31 July 2013)

Trembling Hand said:


> You talking after hours? No haven't even looked at them. Hopefully never will. If you are talking about the longer Honkers day time. No not really. Feel like I work too much with 6 hours a day. :




My point was that it looks like you unwound your position around 17:30, when the HSI RTH was closed...but now I've just realized that your chart is likely Melbourne time not HK Time and its Regular Trading Hours for the HSI anyway....So never mind


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## Trembling Hand (31 July 2013)

artist said:


> What does this mean? Communication was down? If so, how did all the ensuing trades take place? I don't understand why you couldn't get out or hedge.




There is no "hedge". The exchange has the worst tech of any large exchange in the world. When you get these really fast sweeps an order can take 5 - 10 seconds to get to market. By that time the damage was done. There was no volume to trade into as some smart ar$e hits it with a 1000 lot and instantly its 100 points lower.


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## CanOz (31 July 2013)

The range chart is a great way to illustrate those sweeps


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## artist (31 July 2013)

Trembling Hand said:


> There is no "hedge". The exchange has the worst tech of any large exchange in the world. When you get these really fast sweeps an order can take 5 - 10 seconds to get to market. By that time the damage was done. There was no volume to trade into as some smart ar$e hits it with a 1000 lot and instantly its 100 points lower.




Thanks for the explanation.


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## boofis (31 July 2013)

Trembling Hand said:


> Though I have no idea how you would do that without a large backing.....




This!! Yesty was a prime example, alot of the trades I took my entries were slightly off either too soon and got pushed out or too late and got the shake out and I had to close them cause I can't afford the extra risk let alone adding to that risk by doubling down and yet if I had've been able to the trades would've yielded the target of ~100 ticks. 
One day I do hope to be able to do it though!


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## havaiana (9 August 2013)

Here is a little live account I've been using to do a bit of a stress testing for the last 3 weeks. My other trading has been my main focus so haven't had that much time to spend on this. Usually after asia is finished I jump on it for a bit so I can test some stuff through some more extreme volatility than is typical of asia and find it a good way to blow off some steam. I'm usually just trying to get into a position rather than worry too much about decent entries. 

On your real account you obviously wouldn't be wanting to experience these type of drawdowns. I fully expected this account to go bust and it definitely would if I kept doing it this way long term. the account has reached a point now that am not comfortable letting it go bust because I am poor, so will trade it more sensibly.

But you can see if position sizes were reduced and a daily stop implemented how it can create quite a nice equity curve.

Note that when the daily stop is implemented some of them down movements would stay down and not bounce straight back up so fast, but still...


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## CanOz (9 August 2013)

You seem like you obviously have some talent Hav, why not keep plugging away at this live account and take your stats to Propex in hopes of getting funded?

I just realized we now have Cav, Pav, and Hav...


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## havaiana (21 August 2013)

Last update. Finished exactly 5 weeks on this averaging exercise today




That spot around trade 210 was a lot dodgier than it looks on the equity curve and led me to think about things and make some changes

Now I add a lot less (more linear, less martingale!) and add less times before i call it quits
I have shifted my time frame out a little. Instead of going for moves on a 1-5 minute chart I'm using the 1 min chart to go for moves on the 5-15 minute charts, this has also spaced out a lot where I will add which reduces the risk, helps me let the good trades run a bit longer and allows me to look for an opportunity to average up as well as down

This exercise has improved my trading a lot, made me just concentrate on coming up with an idea and contingency plan and then just concentrate on buying and selling in the right places. Previously I was just coming up with a half hearted idea, the stop was the contingency plan so the trading ideas didn't need to be as well thought out

My trading has changed a lot from the start of the exercise to the end, in terms of my stats in the future I imagine my win percentage will come down a fair bit, winning trade amount will increase and my profit to risk should increase. I will not consider increasing my position size until my daily stop comes down to 2%

In case anyone is wondering, no I wouldn't have posted my equity curve if I had blown up instead!


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