Prop Training Section 3 - Doubling Down

"Markets can remain irrational longer than you can remain solvent."
John Maynard Keynes

Doubling Down

Human nature is the reason why many double down. Most are incapable of admitting they are wrong. However, good traders must easily and often admit they are wrong and exit their position when a stock is moving against them. You cannot double down and be a successful day trader in this market. You can double up, but you cannot double down.

To double down means to buy more shares when your initial purchase is out of the money, to increase your risk when your initial entry point was higher than it had to be. For instance, you buy 100 shares of HANS at 30, concluding the stock will trade higher. But the 30 bid does not hold and the stock trades lower. Perhaps it trades to 29.80 and you buy another 100 shares for a total of 200 shares. In essence you are long 200 shares at 29.90 because this is your average cost basis. Many new traders utilize this technique because they are attempting to lower their cost basis. Below are the reasons why doubling down doesn't work in this market:

1) The market today.
The strongest stocks can quickly become the weakest. Stocks are choppy. When you average down you may be just as wrong as when you initially opened your position.

2) I do not know of any good day traders who successfully use this strategy in this market.
Steve and I know almost everyone who teaches day trading. It is universal that you don't let stocks go against you. Also, doubling down is the quickest way to identify a trader that will fail quickly. It is what it is. If you double down the market will eliminate you because you are unworthy of participating as a trader.

3) I know many who have tried and failed.
There will always be traders who do not heed our advice. Some haven’t in the past. We lost a promising trader because she failed to listen to our advice about doubling down. She was very smart, nice, and had market experience. Sure enough she doubled down and the stock went much lower. Her losses were much worse because she refused to just hit her initial losing position.

4) I have tried this technique in this market and it didn't work.
I have doubled down in this market. Here is what happens. I am correct about 90 percent of the time. Yet the few times I am wrong my losses are so great that the gains from the 90 percent I was correct are eliminated and then some. It isn't worth it. I know from my own experience. Please do not make this mistake.

5) It's too risky.
New traders must eliminate as much risk as possible. You must always live to play another day. When you double down, you may have just been wrong. And by doubling down you may suffer losses that you cannot sustain. One bad trade can wipe out your trading account. Do you want to risk your trading career on one trade? At the beginning, certainly it is just best to hit a stock if it is going against you and reevaluate. Double up when stocks are moving in your favor but do not double down.

6) There are plenty of opportunities to make money without taking much risk.
I have traded in markets that were difficult to make money. In those you had to take some chances. This market presents plenty of good trading opportunities. Just wait and you will find numerous favorable risk versus reward scenarios.

7) This technique is not profitable.
You could probably double down and be correct 80-90 percent of the time. However, those times you are wrong are crippling. You will wipe out any gains you made from doubling down, with the losses when you are wrong. Stocks act irrationally. Greed and fear cause stocks to trade irrationally. That is their nature. This technique would only work if they were rational and always reverted to their means. But stocks don’t. Sometimes they really do not come back. Sometimes stocks that should bounce go down another 10 points before they bounce 25.