When one averages down on a position, it entails taking only small winners when the price moves in the direction of your position instantly and does not allow for more entries at a better price. On the other hand, your losses are made with your biggest position size. So, you have small wins and large losses. How can that be a profitable strategy?

Generally, it is not except under certain conditions it can be. The conditions being generally where it might work are: if market is mean reverting, you are attempting to capture the spread or profit from volume, or you trading multiple signals or trades on the same market and you manage the size. It doesn't work well if one is (1) highly leveraged and (2) not willing or able to hold for recovery, such as day trading or (3) not managed.

Why you should add to winners and never add to losers

Why you should add to winners and never add to losers Why you should add to winners and never add to losers I recently got an email from Kevin Davey of KJ Trading, aka kevinkdog, regarding his latest blog post entitled Peel Off Trading (. Kevin is a highly respected member of nexusfi.com (formerly BMT) …

Sheen 

When one averages down on a position, it entails taking only small winners when the price moves in the direction of your position instantly and does not allow for more entries at a better price. On the other hand, your losses are made with your biggest position size. So, you have small wins and large losses. How can that be a profitable strategy?

It seems to be the case from my own experience. Average up should be better way.

In my opinion there is no problem with "scaling into" a full position as that denotes a plan of accumulation with a target average price in mind whereas averaging down denotes trying to "repair" after the fact an unprofitable position by adding to a losing position and then hoping for the trade to go in the other direction to get out at breakeven or a profit--sort of right fighting and defending your initial position as opposed to accepting a small loss and moving on (knowing you can always re-enter)

To me a better strategy would be to get out of losers quickly instead of averaging down and instead re-deploy capital in a new position

And even better---Add to winning positions at key profit levels when the trend is continuing in your favor and have with tight stops on the added positions

Sheen 

When one averages down on a position, it entails taking only small winners when the price moves in the direction of your position instantly and does not allow for more entries at a better price. On the other hand, your losses are made with your biggest position size. So, you have small wins and large losses. How can that be a profitable strategy?

Let me take a swing at this one
I always say, every trader will do what works for them.

I'm discretionary so...
I don't religiously do it, and I do it while scalping ONLY, so it's rapid and in a general zone. I stay fluid and loose this way. Basically, the edge I have combines several strategies that continually turn on/off depending on what is evolving in the chart. Usually I keep the total position size a small percentage of total account and once in profit I remove most of the trade size at profit. This keeps me in "sync" with the market (reading the PA and having a general bias for the day which remains flexible).

Today was mostly a grind-up day, which is my least favorite to trade. Along with grind down.
Being able to spot it by 11am or noon is critical. My goal is to define what "type" of price action is dominating the charts. There's no way to program what I'm doing, because even I don't fully understand myself, beyond keeping my losing trades as small as possible. I usually limit my maximum scale-in trade size and have a stop visualized, not always a hard stop - because if it goes against me, I'm pretty much axing the trade instantly closing it out on the spot. It's been rare lately, but then again I'm on a win-streak so I'm on guard for that next possible losing trade where I need to axe it immediately.

I do recall Paul Tudor Jones having a sign in his office that said "Losers Average Losers"...What he meant was something DIFFERENT than a specific scale-in trade plan. What he meant is that you don't average down on just any trade for no reason at all and letting it run out of control without a stop at all. And as I remind myself, hard rules are meant to be broken or flexed - other than daily loss limit rule.