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Jerry,
If you're a large trader >10 contracts in one market a day, the overhead of
doing business off floor can be substantial. Trying to buy a bottom 3
times on a 20 lot (a modest amount) in Bonds with slippage, $12/RT
commission can get expensive fast. And there's no garuntee you'll get it
all back. And then there's the even bigger trader in say a Grains or the
SP (100 lots) that besides the commission, may not be able to exit their
position in one gulp. They may have to say sell 10 over here and ten over
there while the market continues to fall. All of this can get expensive
fast. The biggest lure of day trading is fast, big profits. Big profits
that come from double size. Execution can be a problem.
It would be easier to average that loss down knowing that 9 times out of
10, they'll average it correctly. Between their tradig skill (picking
bottoms) and the overwhleming percentage of time the market will retrace up
and down during the day, their odds are darn good of not only getting out
of a looser but making money. They rely on their ability to spot trend
days and not average down on those days. If they judge incorrectly, then
they get blown up.
Read West of Wall Street as an example.
However, I agree with you. As a small spec, trading 1-10 lots, I would
rather just take several small losses. But even this has it's problems.
1. Dicipline is essential with this technique. It takes real fortitude and
dicipline to attempt to buy a bottom several times. Repeatedly eating
slippage and extra commissions take a not-too-insignificant toll.
2. What if you stop yourself one or ticks within the top/bottom. As the
market starts to go the other way, will you go with it? Again, it takes
dicipline to have the mindset of a contratrend trader and then totally
abandon that to go with a move when you were stopped out prematurely.
Averaging down would avoid this.
This aside, the weight of evidence cannot be refuted. Successful traders
I've talked to cut their losses short with stops. In my travels, winners
that become loosers at some point (or just out and out loosers) average
down. It just takes one to wipe you out.
I herd a story a few months back about this bond trader that lost 100
million. He kept averaging and averaging until he couldn't hold the
position any longer. He had to cut it. When you consider what is on the
line when you trade, beyond the money, it takes a great deal of
indifference to average down. Do you think this guy reached for the
Peptobismol or something stronger that day?
Brian.
-----Original Message-----
From: Jerry Baker [SMTP:jlbaker@xxxxxxxxxxxx]
Sent: Tuesday, March 17, 1998 10:58 AM
To: bmassey@xxxxxxxxxx; omega-list@xxxxxxxxxx
Subject: Re: My main man Money...
Why would anyone average down losses in day-trading when you can get out
quick and know there will be another train along in just a few minutes?
Jerry
----------
> From: Brian Massey <bnm03@xxxxxxx>
> To: omega-list@xxxxxxxxxx
> Subject: My main man Money...
> Date: Monday, March 16, 1998 9:12 AM
>
> Ok. Let's talk money management. From the sound of it, the money
> management schemes should be more highly prized than actual trading
systems
> since many believe (as do I) that this is just as critical if not more
> critical, than timing.
>
> I'd like to know how some of you determine how many contracts to buy and
> how much to risk on each trade. The old adage of risking only 1-2% of
> capital base is fine if you're trading with $1x10^6 dollars but if
you're
> trading with a relatively small account ($30,000 or so) the only way to
get
> larger is to push it (trade more than 1-2%)
>
> Do you average down? Averaging down, even during the day, makes me
shiver.
> Subconsciously, I can't handle it. So far I've listened to that little
> voice. However, many, many times it would have worked out. If you
> incorporate a few strict rules around an averaging down plan, couldn't it
> work?
>
> Perhaps limiting your averaging down in strong trends when you're buying
> retracements would work over the long haul?
>
> Are there any day traders that like to average down so they can exit
> loosing position gracefully? If so, what are the rules you follow?
>
> Some floor traders will average down as much as twice, each time doubling
> their loosing positions. If it still doesn't work out by then, they cut
it
> all and have lost a bundle. Physiologically this would be hard for me to
> come back from.
>
> As for me, my money management is a mix of science and art. My stop
point
> determines where I get in. The quality of the signal determines how much
I
> risk. For instance I'll give more weight to a solid inverse head and
> shoulders pattern than I will a spike up amidst a hard down. A dead cat
> bounce is a high probability trade so I'll usually load the boat. I'm
> always risking at least 5-10%. Anything less, and I'd have to trade
> Midams.
>
> I have what I think are tight stops. 4-8 points in bonds. 1-2 points in
> SP. This may seem unreasonable to some but I've found that it's easier
for
> me to come back after taking small losses than waiting around for a
loosing
> position to come back. Taking small losses is how all the pit traders
I've
> talked with trade (3 people). It makes sense but is harder than doing
> nothing. I've played the waiting game before. It's hell. I feel stupid
> when I wait for something to come back. This has hurt me more than once.
> I may exit an eventual winning position prematurely with a small loss,
but
> I'm assured of staying in the game. My timing is not so bad that I know
> within the next few trades I'll have a winner or two.
>
> Sometimes I like to stop and reverse. I can't count how many times I
would
> have made back everything I'd lost plus a ton more if I had a consistent
> stop and reverse policy. How do you feel about that? Have any of you
> incorporated this into your methods?
>
> Do any of you out there (position traders mainly) "push" your winners?
How
> important do you feel this is to your success/failure? Some systems call
> for adding to winners in a 3:2:1 fashion. Buy 3 as your base, when the
> market's confirmed your entry, add 2 more, then upon further confirmation
> add 1 more, etc. Has this worked for you? Has it failed?
>
> I think diversity is extremely important. Both technically and
> psychologically. I used to believe that it was better to put all your
eggs
> in one basket so that when you were right, you were really right! But
this
> never seemed to work for me enough. Staying diversified seems to work.
I
> like at least 3 markets in my position trading portfolio.
>
> What are your thoughts on this?
>
> The discussion's open. I will value your feedback.
>
> Thanks,
> Brian.
>
>
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