Hi Glen, your thread's at the top of the charts! Congrats!!
Here's one that I'm sure will ellicit some disagreement, but I follow it:
Don't give too much weight to conventional wisdom. People can tend to view conventional wisdom as a roadblock; as if it were a "law of nature" that can not and will not be violated, and therefore they never really examine the concept-in-question to try and exploit a hidden opportunity.
Conventional wisdom is always a generalization; therefore conventional wisdom always has some holes. I have learned to always look beyond, behind, and through conventional wisdom, trying to find specific instances where it can be violated.
Averaging down is one such case. There is at least one strategic method of averaging down ONCE (or averaging up ONCE for shorts) that does work. I practice it. It requires choppy markets, and it requires that you enter the trade with the INTENT to average down once by opening your position as a partial position.
The basic flaw in using "don't averaging down" as an absolute RULE is that you must call the entry point precisely. This is very difficult to do in choppy markets, as head-fake breakouts happen often. With proper asset allocation, averaging down once in choppy markets exposes you to exactly the same risk of captial, and in choppy markets can give better risk/reward with regularity, as opposed to trying to time the entry point exactly, then getting stopped out on the "head-fake."
Few people do this. For most people, an entry position is an all or nothing proposition....100% right now, or 0% (which is fine in a strongly trending market). Give it a try with some paper trades. The market is in the proper mode for the "averaging down once" strategy now.
The trend is your friend is another "Law of Conventional Wisdom." I don't recall who coined this "addendum," but it goes something like this:
The trend is your friend...unless the trend is about to end.
There are many, many cases where the trend wasn't such a good buddy recently, where stocks reversed strong uptrends and tanked intraday.
dh |
