Quote:
Originally Posted by SnerpGoodWord  Here's a basic question: if you refuse to sell at a loss, and instead average down, what happens in the event the price of the security (or FX pair or derivitive) you're trading goes to zero?
Answer: you lose everything.
Averaging down produces only the illusion of profits - long strings of marginally profitable trades followed by one huge blowup. It's like a reverse lottery for the misinformed. |
Currencies never go to zero. Commodities and indexes never go to zero either. And besides, the reason I switched to carry trading, was precisely that, all the positions do turn around eventually. One example: The USDCHF fell from 1.17 to 0,7000 (roughly). I was long at 1.15, sold at a loss at 1.08. Was long again at 0.9974 sold at a loss at 0.9903. After falling all the way to 0,7000, guess where it's at now? That's right, 0.9450. Guess who made money on that position? My brokers. And this time the USDCHF is going up for real, because the Swiss Central Bank has decided that enough is enough and has pegged the exchange rate of the EURCHF to 1.20.
Plus, the so-called problem of averaging down is only one when you're leveraged. If you were to average down the EURUSD by buying 5 lots of 10,000 over time at 1:1 leverage, all you'd have is a paper loss. Let's say your average price you bought those lots at is 1.29. Sure it may go down to 1.10 (that's a 1900*5 pips loss=9500 dollars paper loss) but the price will eventually go back up. Imagine holding that position until the exchange rate reaches 1.45. That's a profit of 5*1600 pips = 8000 dollars, up from a paper loss of 9500. Some brokers may even pay you interest when you're long the EURUSD.
On the other hand I did have an automated system that closed trades very quickly and traded very frequently. It had a huge return (about 50% on 5,000 Euros), the only problem was that I didn't know how to optimize for fast quick drops as it would keep trading against the trend.
The planned change in Metatrader, which will average the price of your positions instead of keeping them separate, will only compound the difficulties in making a profit trading.