Far and away the worst error anyone can commit is to add to a position that is a loser. There is no worse curse than making money while violating this cardinal sin of trading. We are only setting ourselves up for the one that doesn't come back.
Averaging down, as it is called, means that we are going against the grain of the market. Our initial decision was wrong, and now it is compounded by our hoping that the market won't have to come back much in order to show a profit. For example, we initially purchased ABC at 20 and now it is selling at 15, and we decide to buy more. We would be guilty of adding to a losing position. The converse is true for the short side. We are hoping that the trend of the market will reverse soon in order to prove our initial decision right. In essence, You are saying, "I know that the market is going to turn and prove me correct". Sometimes it does. But when it doesn't, major hemorrhaging quickly ensues.
First we must recognize the weapons we are using to sink our financial ship in the murky waters of the market. Only when we see that we are our own worst enemy, we can move on to the process of extinguishing the fire from our dealings with the market. Doubling down is predicated on the hope that the market will reverse itself. It flies in the face of the trend at that moment. Who says that a market has to reverse itself?
Just because something that once sold for 80 now sells for 40 doesn't make it cheap or a bargain. We double down because our egos do not like being wrong. It does not like to admit defeat. It tells us to hold on, double down, do anything but admit that we are wrong. Our ego will invent the weirdest rationalizations for adding to the losing position. It will go through strange mathematical constructions showing that because our average cost is lower, we can get out profitably with just a slight reversal in the trend. But who can know for sure when that reversal will come?
Don't let your ego trick you into believing that doubling down is a winning strategy. Once you relent to its demand, it will blind you, preventing you from looking directly at reality. You will want to feel right no matter what the cost. In the end, you would rather be right than make money.
Averaging down, as it is called, means that we are going against the grain of the market. Our initial decision was wrong, and now it is compounded by our hoping that the market won't have to come back much in order to show a profit. For example, we initially purchased ABC at 20 and now it is selling at 15, and we decide to buy more. We would be guilty of adding to a losing position. The converse is true for the short side. We are hoping that the trend of the market will reverse soon in order to prove our initial decision right. In essence, You are saying, "I know that the market is going to turn and prove me correct". Sometimes it does. But when it doesn't, major hemorrhaging quickly ensues.
First we must recognize the weapons we are using to sink our financial ship in the murky waters of the market. Only when we see that we are our own worst enemy, we can move on to the process of extinguishing the fire from our dealings with the market. Doubling down is predicated on the hope that the market will reverse itself. It flies in the face of the trend at that moment. Who says that a market has to reverse itself?
Just because something that once sold for 80 now sells for 40 doesn't make it cheap or a bargain. We double down because our egos do not like being wrong. It does not like to admit defeat. It tells us to hold on, double down, do anything but admit that we are wrong. Our ego will invent the weirdest rationalizations for adding to the losing position. It will go through strange mathematical constructions showing that because our average cost is lower, we can get out profitably with just a slight reversal in the trend. But who can know for sure when that reversal will come?
Don't let your ego trick you into believing that doubling down is a winning strategy. Once you relent to its demand, it will blind you, preventing you from looking directly at reality. You will want to feel right no matter what the cost. In the end, you would rather be right than make money.
