Wednesday, 31 August 2011

Doubling Down

My criteria for an outside in trade is the ability to double down. By doubling down, I mean that I add to a loser. I know that eventually the price will get back to my EMAs so this strategy works for me if my original trade was correct, albeit at not the best trade location.

I do have a drop dead stop as "the market can stay irrational longer than I can stay solvent". When I put the outside in position on, I have secondary and even tertiary areas where I will add to that loser. And, of course, where I yell "uncle" and cut my position.

But the doubling down increases my profitability quite a lot. Firstly, I'm not taking unnecessary losses and end up with a winner instead of a loser - a big difference to my bottom line.

And secondly, I put additional positions on without increasing my dollar risk by much, if at all. My position sizing is related to the risk of the trade so I may start with a 25% position and my  stop on the entire position will be equal to or even less than a normal 100% position.

Its the math.. I would not recommend that anyone tries this without deep testing - as with everything -  so that the math is understood and shown to work in the way that you implement it.

Below is an example from today. Not the cleverest trade I must say but it did make money and it could have been a loser. I was trying to manage an ES trade from the DAX Market Profile, probably a stupidity in itself and the original sale was misconceived but I was trying something out. That's my excuse anyway. But it is a good example of the technique. I covered just above the 33 EMA. I guess this is a reversion to mean technique. I will be teaching some of these techniques in the November Workshop. This trade can become an 80% plus winner if done correctly.

The rest of the day in the ES was great. We've got some nice MarketDelta signals developed so those of you who are coming to the November Workshop and use MD will have a good starting point to build on, perhaps adding some of the metrics unique to MarketDelta.

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