Monday, 14 June 2010

Doubling Down

One of the sayings you learn as a new trader is to"never average a loser". This is true for inside out trades but often not true for outside in trades.

I know that this statement will be very controversial but if it's done to particular rules that are part of my trading plan then it's an effective tool.

Outside in trades are trades that are triggered at potential tops and bottoms of swings. That in itself is a "riskier" (read lower win rate) trade. However, these outside in trades, if you get them right, give the greatest trade locations. And sometimes, I enter them too early. When I take these trades, I am buying an oversold and selling an overbought market in my time frame. I am also, in most cases but not always, leaning on some support or resistance area. Sometimes these support and resistance areas are not knife sharp and hence the too early entry.  When that happens and ALL the reasons for having entered the trade is still in place, I double down (average the position) with a view to taking the original position off at its original entry price leaving only a single position in the trade.

The doubling down is taken right in front of the spot where I would stop myself out as wrong. This rule is important as it means that the risk on the additional contracts is very small. It allows me to take advantage of a better trade location, getting my risk back to normal quite quickly. This is not appropriate for most inside out trades as these trades should go in my favour straight away.

This is quite an advanced technique and should not be used until a trader is more experienced and can carry out this operation without requiring extra deodorant.

Today's trades were interesting as usual. Wonderful how no two days are the same, although you can always find something similar you have seen. The gap didn't close in the first couple of hours. It didn't look like it would. I had two small sells then turned it around and bought it for the run up to the POCs of 3rd of June. I then sold it short too early and had to double down and took a small profit out of the trade. It was a coincidence as I had written the topic of the post above before this trade. You can see the trades number 4 and 5 which were sold near the highs of each of those bars.


  1. There was a good article in S&C magazine a while back that talked about the math behind scaling in either direction. The bottom line was adding to positions worked well IF AND ONLY IF the original stop loss point was maintained. Validates your point above.

  2. El

    A couple of questions to your entries
    Before Trade 1, there were a couple of EMA crosses, EMA turning red, confirmed by predominant bid, which could have been shorts, why didn’t you consider them?

    To Trade 1: not waiting for the EMA cross, what this an aggressive entry or there was another reason which prompted you to go short?

    Thank you for your insightful blog

  3. George, have a look at the Profile. I was selling against resistance.