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the myth of averaging down for traders
- Thread starter Ivano
- Start date
How about all those "investors" who thought J C Penney stock was the Cat's Meow at $87/shr. Did they "dollar cost average" and buy more when it dropped to $70/shr? Then buy more when it dropped to $50/shr? Maybe buy some more when it hit $25/shr? How about a few years later when it was basically a penny stock at $1 a share and delisted from the exchange? Where did they throw in the towel along the way and take the loss? 25% loss? 50%? 80%? Recovering from a loss like that would take a Herculean effort.
Yes provided that the real value of that dollar bill really stays at $20 and has the potential of even going up higher than $20 in the future after I buy it at $15 or $10. If it has the potential of dropping to $5 after I buy it then no.
Everyone is right, and everyone is wrong - if you average down you will crater in the medium to long term from a long-tail event, it is built in to the markets, if you use stop-loss you will lose in the short term from market whipsaws and costs, it is built in to the markets.
The key is timing, averaging down can work to gain experience and regain losses, a stop-loss can work when you have a perfected entry scenario (the close price or high/low price are determining factors).
those same investors were likely looking at the company’s prospects and seeing it diminish and sold. (Which is why the stock kept selling off).
In the meantime all the MOMO guys were selling at the bottom of the flash crash and the pandemic because the chart told them too and you only average into winners. They are all short Tesla at 100 as well.
In the meantime all the MOMO guys were selling at the bottom of the flash crash and the pandemic because the chart told them too and you only average into winners. They are all short Tesla at 100 as well.
Actually there was lots of warning to get out early for a momo trader.
Yup of course especially TSLA lol. To the moon and then almost 3/4rds of the way back down.
If that doesn't scream to a momo trader, at some point after the top, to get out ... nothing will.
Started a swing trading portfolio early last year with no SL & scale in long-only.
Time-frames ... Weekly/Daily
Ended the year in the green but not sure how much.
Key takeaways: (Swing NOT Daytrade)
1-Don't add too quickly. (5-15% between entries) Biggest mistake by martingale traders IMO.
2-Use MANY positions/stocks. I ended the year with ~120. This removes the urge to add too quickly. A few dropping >50% is less painful. I avoid tech.
3-After ___ entries, halt further entries until there's a sign of a bottom. Check recent news to find out why it's falling so much. I like Seeking Alpha and the comments are actually more useful than the articles IMO.
4-I pay very little attention to individual company fundamentals. Too many to follow. Only check when the chart gets a bit ugly.
5-Scale out also. After an entry, place a sell order 5-15% above and a buy order 5-15% below.
6-Use stocks/ETFs/sectors you're willing to invest in. I pick sectors I like (REITs, metals, energy, etc...) then pick stocks in those sectors without getting too picky about each company.
***Outperformed the market in a down year but feel it may underperform in an up year.
***Would NOT average down for day-trading. Cut the losers, trail the winners.
Conclusion: Averaging down can work if done with a plan IMO. Is it better than cutting the losers? Probably not. My experiment is far too short to know. Remind me to update in Dec/Jan.
Time-frames ... Weekly/Daily
Ended the year in the green but not sure how much.
Key takeaways: (Swing NOT Daytrade)
1-Don't add too quickly. (5-15% between entries) Biggest mistake by martingale traders IMO.
2-Use MANY positions/stocks. I ended the year with ~120. This removes the urge to add too quickly. A few dropping >50% is less painful. I avoid tech.
3-After ___ entries, halt further entries until there's a sign of a bottom. Check recent news to find out why it's falling so much. I like Seeking Alpha and the comments are actually more useful than the articles IMO.
4-I pay very little attention to individual company fundamentals. Too many to follow. Only check when the chart gets a bit ugly.
5-Scale out also. After an entry, place a sell order 5-15% above and a buy order 5-15% below.
6-Use stocks/ETFs/sectors you're willing to invest in. I pick sectors I like (REITs, metals, energy, etc...) then pick stocks in those sectors without getting too picky about each company.
***Outperformed the market in a down year but feel it may underperform in an up year.
***Would NOT average down for day-trading. Cut the losers, trail the winners.
Conclusion: Averaging down can work if done with a plan IMO. Is it better than cutting the losers? Probably not. My experiment is far too short to know. Remind me to update in Dec/Jan.