Re: Averaging Down
This is not specifically for P. Webster, but I don't know how to post to myself.
I am a bit late with this but I wanted to comment on the question of averaging down that appeared a few days ago.
Judging from many of the posts I read, I believe that many of the writers are wasting money as a result of the lack of a disciplined trading strategy. As a short term trader, you should not consider averaging down. In fact, you should not even be in the position where you ask yourself the question.
A good policy is to write down your exit point before you enter into a trade in the event of a decline in price. The exit point as a percentage of the purchase price will vary inversely with the volatility of the stock. However, if you buy on pullbacks in an uptrend, 90% is a reasonable exit. Also, if your stock rises you should keep revising your exit point upward to a percentage of each new high made by the stock. You will make better trading decisions if you decide on your exit points before you buy.
Once you have made the decision and purchased a stock the purchase price you paid becomes a "sunk cost" and should have no bearing on your decision to purchase more of the stock. Your decision to buy more should be based on your view of the probability of success of the new transaction, not on the results of your previous decision.
If you are thinking of hanging on and averaging down to establish a lower average cost of purchase consider this:
Scenario 1: Purchase 100 shares of ABC at $60.00. Price starts falling but your hold on hoping for an upturn. At $40.00 you decide that the stock is ready to move up and buy a further 100 shares at $40.00. Your average cost is $50.00 per share for 200 shares.
Scenario 2: Purchase 100 shares of ABC at $60.00. Price starts falling and you exit at your predetermined exit point of $54.00 for a $600 loss. At $40.00 you decide that the stock is ready to move up and buy 200 shares at $40.00. Total cost including the $600 loss is $8,600 for an average cost of $43.00 per share.
Of course, the extra brokerage fees will affect the calculation.
Sorry if I rambled on but I believe that you will increase your profits by learning to make better sell decisions. These decisions are far better made in advance of your purchase rather that afterwards when you are trying to balance the conflicting forces of fear and greed.
On a different note, a public thank-you from a lurker to Andrew, Kevin, P. and all of the contributors that make this a great thread. Your insights and analysis are valuable and appreciated.
Al |
