Averaging Up is fine, Down isn't. Basic Math
If the stock is going up, and you add to your postion, and it still goes up, then the profit continues. Averaging down is one of the greatest mistakes you can make. My first degree was in math, but I will make this simple.
It only works if the stock DOES rebound.
$1000 shares x $10/share = $10,000
the price goes down to $8, meaning you lost $2,000.
You Average down another 1000 shares x $8 = 8,000
for a total of $18,000 for 2000 shares, or $9/share
But you are still down $2000.
Now, if the stock goes up to $9 a share, you break even,
2000 shares x $9/share = $18,000
If it goes back to $10/share, you only make the $2000 on the money you invested at $8, as the original buy is out flat.
If however, the stock does not recover, you stand to lose more.
The percentages confuse things. The bottom line is what the cash input and return is.
The better route is to place an 8% stop loss. The $10 stock goes down to 9.25 or 9.125 and you bail. On 1000 shares you lose $750-875. When it hits $8, you buy again and lets say it goes to $9 as in the example above, you are now up $1000, or $125-250 net counting the previous loss. In the Average Down example up above, at $9 you are only breaking even.
And, if you were wrong and the stock now goes further down from $8, your loss is still less than averaging down.
This help?
lastshadow |
