Here is an insight from Dough Kass, I subscribe to the same theory
"I wanted to emphasize something that is obvious to all subscribers that have been around for a while.
As a matter of strategy it is my modus operandi to almost always average into positions (long and short) based on the notion that it is impossible for me to figure out the perfect/ideal entry point.
My sense is that many contributors go all in at the get-go in putting on positions and their first price is close to their average cost.
It is great having that confidence, but after four decades in this business, I simply cant exact that precision.
This means, from the first time I mention a position -- let's use my PowerShares QQQ (QQQ)short as an example -- I am averaging up or down (based on macro or micro factors), and my total cost basis might be (far) different from my original mention.
Again, QQQ is a good example.
I originally mentioned the short at $77.40, but with today's large short add, my average cost is now slighlty over $79.
I hope my approach is well understood."
This is how I usually enter into and out of a position using inter-market analysis to gauge strength/weakness
"OK so averaging in and averaging out .............Here we go.
A trader can never catch the top or bottom , all we can do is get a smooth average. I can trade up to 10 contracts, therefore I always attempt to get a smooth average.
I get a smooth average in and a smooth average out.
Hence I spread my entry within a 5 point variance usually unless the market is very volatile. This kills 2 birds with one stone as it can also help those following my trades as;
1. get a smooth average
2. account for different prices on everyones trading platform
3. account for time delay in receiving message by subscribers
Lets take an example of a short trade on CAC ...
short cac 3485 upto 3490
avg = 3488
sl = 3518
tgt = 3458
I will go through every scenario that could have played out .........
CAC spikes and trades upto 3500
I start to average in 2 contracts then keep adding to get a good average.
So I enter @ 3485-3500.............. = 3492 avg = better average
Stop loss always remains stagnant and never changes regardless of what my average is.
Scenario 2: CAC only goes up to 3490 then falls sharply
I start to enter from 3485 - 3490 etc ........ this time I get an avg of 3488 .
my stop loss always remains the same at 3518 regardless.
scenario 3 CAC only goes upto 3486 and falls very quickly
I then have to add lower down so entry 3485 , 3485, 3484, 3883, 3842,
3480 etc etc
my avg is poor 3482 or even lower
But my stop loss remains the same at 3518
All 3 scenarios have varying degrees of risk , some more than others. I operate based on a high accuracy , otherwise my strategy would not work as it can involve too much risk.
The strategy and trading methodology that I employ operates at 80%-
90% accuracy level as my subscribers will testify. I have been operating my Live Analysis Service for almost 8 years now and I have only had 11 losing weeks this far, and that was when the markets were illogical/volatile , moving in vertical lines and negating every support resistance level.
The majority of my trades certainly achieve the desired average , the minority achieve a better/worse average ...which in the long run cancel each other out.
The most important point is the fact that my stop loss is only hit 5-10% of the time, therefore even if a poor average is achieved, one may make less points (or more given ones average maybe better).
It swings in roundabouts...
I strictly adhere to my inter-market analysis approach and I can adapt to bias changes very rapidly, reading between the lines quickly given the amount of manipulation/intervention/news flow from policy makers in recent times.
I average in to a trade based on the weakness/strength of my inter-market analysis variables ( those who have taken the mentoring will know is ...1. risk fx, 2. commods, 3. equities/indices). Sometimes I enter more contracts at one price based on strength/weakness and vice versa, again one must understand the relationships between risk FX , commods and equities in order to gauge strength/weakness independently.
I encourage all new subscribers to take up the mentoring programme in order to help understand inter-market analysis....especially if you want to be independent traders.
I hope that has helped clarify it.