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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: Herc who wrote (5148)	11/3/1999 12:13:00 AM
From: Dan Duchardt	Read Replies (3) \| Respond to of 18137

Herc, et al. OK, I've been biting my tongue on this one, but it just won't seem to go away, so I'll throw in my $.02. From an abstract perspective, averaging down is a perfectly rational trading strategy, unless you believe in a random walk theory wherein the next tick is totally uncorrelated with price history, which is antithetical to the technical analysis most here seem to believe is relevant. Just because a stock initially moves against you does not mean that your initial bias was wrong. Eric just cited a perfect example of getting shaken out of a position that ultimately went his predicted way. Why did that stock turn around? Because "The Market" responded to the dropping price with increased buying pressure, not because of pure chance. I stopped out of SUNW a week ago at 91 and change because I was not willing to take a loss, put my money into something that looked more promising and made a point or two. I missed over 15 I could have had with SUNW in less than a week. No one can ever predict with certainty when a reversal will occur, but you can make a case for increased probability of a reversal, and a more dramatic reversal, the farther a stock moves away from what might be called, for want of a better term a "natural level". The natural level is not a constant of the universe as it may very well depend on factors such as news, company performance, the macro environment, the momentum of that particular stock, etc., but at any given time it exists, and the more a price deviates from that level, the higher the probability it will converge to that level. All of us bet on this truth every time we enter a trade. Averaging is nothing more than putting new money on a stock that we believe has deviated farther from its natural level. Whether such a strategy is appropriate is largely a function of style and degree of risk associated with each position. Pure daytraders tend to expose large percentages of their capital on a single position and must necessarily be quick to pull the plug when a stock breaks a support/resistance level, because the next one may be too large a percentage of their total capital away to risk it. At the opposite extreme, Warren Buffet never sells anything, so I am told, because he can afford to absorb near term paper losses and wait for the reversal he knows will come on his "good companies". Not everyone who uses averaging as part of their strategy is an investor. Swingtraders I know of often average, and often do it successfully. I have been doing it the last couple of months with reasonable success, partly because of weird constraints placed on an account I have with a major brokerage firm (that I would not recommend to anybody). I have been following the performance of a swingtrader advisory service for 2 years where averaging is routine. The number of ultimate winners far exceeds the number of losers, and the average return is very healthy. The percentage losses tend to be large when they do occur, but they are infrequent. The important thing is not whether you choose to average or not. The important thing is to manage your capital so that you never are overexposed in any one position, or have too much of your capital in jeopardy at any one time. I'm still looking for the right place to establish a daytrading account. I'm looking into a couple that have commissions tied to share count. If I find one that has efficient order entry and effective executions I will sign up because I think the freedom to enter a position through accumulation, and to gradually unwind a position is a greater benefit than the direct market access offered by the high-end daytrading firms. I intend to be a swingtrader, holding positions anywhere from a few minutes to a few days, but I will certainly not be an investor. A grim analogy may help make the point. Averaging as opposed to stopping out quickly is like flying instead of driving. On the infrequent occasions when something goes wrong in the air, the event is dramatic and the losses are heavy. When something goes terribly wrong on the road, the losses are lighter, and often go unnoticed by the masses, but they add up and do just as much damage. Dan