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This is my rationale (and you're welcome to yours, which may be better than
mine):
Trading options and stocks (assuming you're not borrowing on margin), you
pay 100%. If you lose, you lose everything you've paid. On the other
hand, if you're trading futures, you pay maybe 5% or 1% margin, and the
rest you borrow. So if you average down on the futures, your loss is
virtually bottomless.
All figures are hypotheical.
Trading IBM stocks:
1. Buy 100 shares of IBM @ 150, total $15,000.
2. Buy 150 shares of IBM @ 120, total $18,000.
3. Buy 200 shares of IBM @ 100, TOTAL $20,000.
Total shares bought= 450; total $= 53,000.
If IBM goes to $0 (probability less than 0.001%), you lose $53,000 +
commission.
Trading IBM 2001 leaps:
1. Buy 10 contracts @ 15, total $15,000.
2. Buy 15 contracts @ 12, total $18,000.
3, Buy 20 contracts @ 10, total $20,000.
Total contracts bought= 45; total $= 53,000.
If INM 2001 leaps goes to $0 (maybe, but not likely unless it's a BEAR
market), you lose $53,000 + commission.
Trading soybeans futures (1 point move = $5000) (Sorry, I'm out of futures
market for over 10 years and the figures may not be right - but then this
is only an illustration).
Start buying at $5.00, and averaging every $0.50 down. Finally sell
everything at $2.00.
per per
contract contract # of
Buy @ Sell @ Pts loss $ loss contracts $loss
----- ------ -------- -------- --------- -------- 1. 5.00 2.00 -3.00
-15,000 12 -180,000
2. 4.50 2.00 -2.50 -12,500 16 -200,000
3. 4.00 2.00 -2.00 -10,000 20 -200,000
--------
total loss -580,000
(Total paid based on 5% margin= $53,000 - Am I right?)
In this futures case, I stand to lose, not just the 100% cash I put up, but
much more.
Since a lot of you are futures experts, please do necessary math
corrections. But my conclusion seems to indicate that you lose a lot more
than you've paid up front.
That makes futures trading an extreme risk using averaging down approach,
assuming the worst outcome.
Regards,
Wong
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At 10:42 AM 03/22/99 -0800, you wrote:
>> DO NOT USE AIM (OR ANY AVERAGING DOWN APPROACH) TO TRADE FUTURES. IT WILL
>> BE FINANCIAL SUICIDE !!!!!!
>
>So, if averaging down is no good for futures, why is it any good for
>options or stocks (assuming equal leverage is used for each)? Could it
>be that the main success of the method is due to picking the right
>stocks and averaging down contributes little or nothing to profits? In
>Vegas, they have a not-very-complimentary word to describe people who
>average down. :-)
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