We do not consider playing a defensive way of buying "safe" files because safe stocks will not make any money. We have movement, but there are ways to help you survive huge mood swings that momentum stocks can display. Today we look at the idea of the "average down" and if it is a good idea or not. It is not a simple answer.
The concept behind the average down is that if you buy it at 100 and it is XYZ
to 90 and you buy more your "average" cost is only 95 now. So if XYZ bounces
up, you just need to reach 95 to break even on the trade. The idea sounds reasonable, right? Well, "maybe / sometimes."
For the most part of the problem with the average down is that people
use it to justify. poor trade If you buy XYZ with the idea that it is
up and it starts to fall, you should ask why? If the market is healthy, and
XYZ has not released any bad news, XYZ should at least hold its own right? Well someone does not like it and you do not know the reason why, yet. Now, imagine that you buy to "average down" more XYZ and then the next day "tree" they give some kind of bad news. You have effectively bought more shares of a bad trade. So in this case average has hurt you down. So naturally the question is, "you have ever average down?" and that answer is "yes" at times.
Lets take an example: Suppose you are in the XYZ because they just announced good earnings a day ago and they are trading higher. But then ABC, in the same sector announces profits and they miss by a mile. Are more often than not the stock in the whole industry will hit a little. Overall this is a trap and sympathy because XYZ did nothing wrong, buy more on that kind of dip is often a good idea. They are usually not long lived and can get. Chance to buy at a bargain price more XYZ
Part 2 **
How about buying more (below average) simply because the market is having
a bad hair day? This is difficult, but try and follow the reasoning. It all depends on what XYZ has done. Lately
For the most part, if XYZ an "orderly rise" has had and they take a step back because the market burped, we have no objections to the average down and buy some more, hoping that the market the next day and XYZ will rebound will be on the move again. BUT and this is very important, if XYZ already been carried out for a number of points, the answer is very difficult to say. We are conservative about a lot of things and when a stock has moved several points in two weeks and then gets hit to sell in a bad market, we do not recommend buying more and here the average down. Why? two reasons. First, if you already have an increase of $ 5 and XYZ is hit for two in one day drop, you're still up $ 3. But if you buy the market still remains another day, now you really eat into your profits. Since we never really know how far a market will "shake" you could buy in a pretty big hole. So, what we want to do in a case like this is just to take the first fall as violating your stop loss point your profit. If it wants catfish, you're a good profit and when it bottoms out and starts you can buy another backup. If it does not hit your stop loss point on his first fall, instead of buying more, sit tight and see what the next day. If the next day looks like it will rebound, THEN, buy some more.
We emphasize this point for a reason. A few weeks many files are several points in just a few days. Sure, you would expect a shake-out and get it, but what happens if it does not pop up again? This happened with the Internet stocks back in April of 1999 and many people were trapped all summer "hope" to get their money. So, the point is, the average down does have
its place if used wisely. But we did not use to justify a bad trade and we
generally not be used to add to a recent high flier that is falling apart. We would rather sell that high flier, pocket our profits and buy back in when the trough and began to climb.
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