[jackb]

Just got Elder's latest email and I was left a bit slack jawed after reading it. Here's some pertinent excerpts:

Today I would like to look into one of the techniques popular among experienced day-traders – doubling down on a losing position. This brings down the average cost and allows you to get out of a losing trade at a profit. This technique is absolutely deadly in inexperienced hands – all it will do is double up your losses. It is only recommended for experienced traders with excellent discipline. First point – doubling down is only recommended for relatively small-size losing trades. If you are in a large enough trade that the loss is stressing you – then you absolutely should not add to that trade and increase your stress level. Doubling down is acceptable only when you feel relaxed and unperturbed, even while your trade is under water. This is a key factor that almost everybody overlooks – doubling down is not just a technical trick; it is acceptable only for relatively small, unstressful trades. Next, the time to double up is when your losing long trade is hanging just above a bottom at which you are determined to draw a firm line. You must say: my hard stop goes here, and if my trade slides down to this level, I am out, automatically.

To repeat my rules for doubling up:
• It is acceptable only for relatively small positions. If the size of your open loss has you feeling stressed, then definitely no doubling.
• Double up only after you see good technical signals
• Place a hard stop on both halves of the trade as soon as you add the second position – a must!
• Handle both positions as a single trade, monitor its average price, and get out as soon as you cut your loss.

Contrast this with Paul Tudor Jones' statement: "Only losers add to losers.:

Let's see how TL members feel about this topic...

[Kiwi]

There are two parts to it:

- It is something that can cause people trouble if it is an emotional response to a currently losing trade rather than part of the plan.

- To add it to a plan you need to do the stats. Entering low will have a poorer win rate than entering higher (you miss all the winners that take off from a higher point) but in return your loss is smaller and your win is bigger. So, as with each potential entry do the expectancies. Also ask yourself: if entering initially has a win rate of 65% then given a low entry will have a win rate of 40% or 30% (say), would I be doing this trade by itself if I hadn't already invested in a (now losing) position.

If the entry low down isn't something you'd do normally then you shouldn't double up (lower win rate, fewer trades per day, but higher win/loss). Something to test is "what happens if I buy the stop loss + a couple of ticks" on every trade I might have entered?

[BlowFish]

Pretty sure there are a couple of occasions in the famous PTJ video where he is buying into a market that is moving against him. Of course I could be completely mistaken. Wasn't there a segment where he is buying a falling Deutschmark all day? Finally stops out with a fairly substantial loss. Dunno it's a while since I watched it.

I guess it depends on your definition of 'loser' if price is still in your 'buy zone' (even if lower) then perhaps it is not a loser.

[Jeff65]

There is a difference between adding to a loser and scaling into a trade as it moves against you. Adding to a loser is often unplanned and violates your risk-per-trade rules. However if your plan is to risk say 3 percent of your capital on a given trade and your plan is to scale in at 1 percent intervals then this is fine.

[MightyMouse]

Originally Posted by Jeff65 »

There is a difference between adding to a loser and scaling into a trade as it moves against you. Adding to a loser is often unplanned and violates your risk-per-trade rules. However if your plan is to risk say 3 percent of your capital on a given trade and your plan is to scale in at 1 percent intervals then this is fine.

In which case, you have to accept that there will be trades that go in your favor that have only 1/3 ( simpled version of your example) of your position on. On the other hand, each stop out will be with your max position.

So, your winner is going to have to go 3 times as far as your loser to break even on a day where you have a single scale winner and a max loser. That doesn't sound like love.

[Kiwi]

Originally Posted by MightyMouse »

That doesn't sound like love.

Thats why you've got to both do the sums and make sure you can stand the win ratios on those third trades.

[BlowFish]

Originally Posted by Jeff65 »

There is a difference between adding to a loser and scaling into a trade as it moves against you. Adding to a loser is often unplanned and violates your risk-per-trade rules. However if your plan is to risk say 3 percent of your capital on a given trade and your plan is to scale in at 1 percent intervals then this is fine.

Exactly. PTJ had a right hand man that did the analysis, they would agree they wanted to be long x DM and then PTJ would get busy 'working' the order. If you are a buy side trader working a large order your job is to get filled at the best possible average price.

It's pretty obvious. Is it an 'oh shoot' emotional response or is it a planned entry where you are fully aware of the risk parameters throughout the process.

[zdo]

It's entirely system dependent. Some systems - Never! Some systems it's ok, even part of the game.

For systems where it is ok, fully "Doubling down" is usually not the optimal concept. Adding to / building the position is a more accurate description of the proper maneveur.

Also, generally speaking, this maneuver is best implemented where the fills are close by, generally in the same as yet incomplete small and short term swing. It is not recommended when there is already a large disparity btwn first fills and where price is now - ie if the original setup is no longer valid, if it's clearly a loser, de nile is rising, and you should have alreay stopped out. That’s what PTJ was talking about and if you haven’t been fortunate enough to fully learn that lesson yet, let me tell that is a wonderful way to pile a whole heap of sustained pain on yo own head...

Find attached a recent example of what I think Elder is talking about. Yesterday, I put on a high leverage very short term hedge of a large percentage of my silver derivative long trades. (Several ‘cycles’ were completing but the tipping point for me was by chance walking by a TV at 5 am and overhearing the network talking heads yapping PM’s up “investors losing trust in yadayada and putting their trust in gold” etc etc. It was ‘intuitive’ - pls blve me, I rarely of rarely of rarely ever use broadcast media for cues) Anyway, the bottom triangle was a mkt order fill at around 29.99. The square above it was a “doubling down” limit order placed shortly after the market fill. The right upper triangle was the fill of the limit at around 30.16 in the next 15 minutes bar. All fills within the same small swing / setup is what I think Elder is talking about generally… don’t think he’s talking about doing the first entry then doubling down if price then proceeded to 31 ( or to generalize, past where should already be stopped out ) . I do similar much shorter time frame type 'doubling down' / position building in the indexes in certain conditions. Happens roughly 3 of the days of any week... may post an example if I have time...

Again - It's entirely system dependent.... in addition
the key word in Elder's article is "...experienced... "