Adding Positions (Averaging Down)

Introduction
Adding positions is an investment technique. It is a tool, not an objective. The goal of investing is to achieve returns with the least risk, so adding positions is only valuable when it helps investors achieve this purpose; otherwise, it should be abandoned.

The Essence of Adding Positions
First and foremost, it must be clear that adding positions is an investment technique. It is a tool, not an objective. The goal of investing is to obtain returns with minimal risk, so adding positions is only useful when it serves this purpose; otherwise, it should be discarded. This is akin to the Diamond Sutra’s teaching: "All teachings are like a raft—even the teachings should be let go, let alone non-teachings."

Suitable Candidates for Adding Positions
In terms of analytical ability, only investors who can accurately predict the market direction for at least the next week should consider adding positions (this requires investors to not only analyze charts but also pay attention to fundamentals, weather, policies, etc.). In terms of trading rhythm, adding positions suits investors who combine short- and medium-term strategies. In terms of capital, adding positions is suitable for larger funds. If 80% of the capital is already deployed, adding positions should not be considered. Alternatively, when the reserve capital-to-current capital ratio reaches or exceeds 1:1, the technique of adding positions becomes applicable.

The Principle Behind Adding Positions
Typically, there are several scenarios where adding positions is necessary:

1. Large Capital: If the capital is too large, entering the market all at once may attract attention. For example, in the case of strong wheat futures, opening 150 contracts or more consecutively for several days could make one a target for institutional players. In such cases, the technique of "breaking into smaller parts" should be used.

2. Fundamental Changes Before Technical Reflection: Speculative markets are not always rational and often exhibit emotional behavior. For instance, when fundamentals improve, the price chart might still fluctuate or even dip before rising, and vice versa. To secure a favorable position while avoiding excessive volatility, the strategy of phased investment should be adopted.

How to Add Positions
The most common method is the pyramid approach. For example, when going long, buy a portion at the bottom (e.g., 80 lots). As the price rises to a certain level, buy another 60 lots. With further increases, buy 40 lots, and so on. This ensures that the total position cost remains below the market average since more is bought at lower prices. When a market reversal is anticipated, close the positions all at once or in two batches—ensuring a quick exit.

Key Considerations for Adding Positions

1. Familiarity with the Asset: Before using this technique, thoroughly understand the asset’s behavior and your own psychological shifts during different market phases. Tracking the asset through at least one full cycle (from uptrend to downtrend or vice versa) is essential.

2. Fundamental Support: Only use this method when fundamentals support a one-sided trend. Applying it during sideways or reversing markets often leads to losses.

3. Pyramid Principle: Always adhere to the pyramid method to maintain a cost advantage.

4. Combination with Other Techniques: Adding positions is often used alongside rolling trades and active hedging.

5. Purpose-Driven: Remember, adding positions is merely a technique aimed at maximizing profits—never add positions for the sake of adding positions.