Averaging Down/Averaging Up

The premise of dollar cost averaging is it generates better average transactional pricepoints over time than all-at-once trading. Investment psychology holds that averaging mitigates emotional trades. At least, that's the theory.

To me if one commits to buy preplanned positions with averaging, it's a six or one half dozen precept. However, if you never average up, you can hamstring upside potential with fractional positions in positive momentum holdings. Essentially it's reinserting emotion, and undercuts the dollar-cost thesis.

Fractioned positions d/t price-escalation-interrupted-purchasing happen to everyone. In March, MsNC put in a decent sized limit order for AMZN at 1695. We only ended up with 10 shares (We virtually never market order, but that's an occasion where I wish we had ). Amazon launched from there. We didn't bite the bullet and buy up. So now we're sitting on 10-15% of the gains we would have. It happens.

If you habitually do that though, IMO you'll underperform what you would if didn't average at all. But check it yourself. Setup a dummy portfolio. When you buy/sell in your real portfolio, decide in advance what size position you'd like to target at the end of averaging. 'Trade' it all at once in your dummy portfolio. Track comparisons over time. See for yourself.

my friend. as long as the music is playing, keep dancing, but don´t forget to stay close to the exit door...

selling at a loss is not averaging down.
buying more at a lower price than what you paid originally is averaging down...the end result is you own more shares at a lower average cost per share

all you did there was take the loss. Not always a bad move though

assuming the stock is not broken I’ll add more if I can on a 5-7% dip. If you are in a good stock that’s all it’s gonna drop in a day

if you are in a stock that falls more than 10% in a day you need to decide what’s causing that. I’ll take a loss before I just add more and pray

ROKU is a good example for me. I do believe that it is a 150 stock, so every time it’s fallen I’ve added if I had the cash. But a volatile spec stock no way, hold and bail if you have to. Don’t ever average down if you are in a stock you plan to flip

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ROKU

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I’m also in that myself, albeit not a big position so I would not be sure when to sell or hold.

Would you treat TQQQ the same? I like to start with a third of my tradable money, and if it goes lower add another small chunk and continue to a point. If it goes up on that original third, then great.

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Do you have a rule of thumb when to average up/down?

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There is no rules of thumb for me, as you have to take in the big picture of the company.

If there is a pullback on some sort of short term news, then that is the most ample opportunity to average down. I am still a believe in the long term of that company, but I know short term there will be some issues.

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What are your guys opinion on when you should average down/up on a stock?

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Long term investment or short term trade?

I don't mind averaging down on a stock with solid fundamentals, but might have a quarterly shortfall that causes the price to temporarily drop. Same thing with averaging up. Only luck would have enabled me to buy it at the bottom. So if the story is still a good one, I don't mind buying it higher, since I plan on holding it for the long term anyway. I've done it many times with stocks like AAPL, NFLX and SQ to name a few.

If it's a shorter term trade, then no, I wouldn't chase it down the rabbit hole, trying to prove to my ego that I was right - in spite of what the charts and my P&L are telling me. Once it crosses my max loss threshold, I'm out.

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The next problem I have is when I should sell something for a profit. What are your typical thresholds?

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For years, I've basically followed the Investor's Business Daily rules for when to sell winners and losers on swing trades:


Why Use Sell Rules?

Once you buy a stock, when should you sell? Many investors simply don't have an exit strategy — and their returns suffer accordingly. But you can use time-proven sell rules to make a huge difference in your portfolio.


Limit Your Losses to 7%-8%

Even the best stocks will sometimes break out, and then drop to slightly below their ideal buy point. If your stock declines more than 8% it usually means something is wrong with your chosen entry point, the company, its industry, the general market, or all the above.


When to Take Profits

One of the greatest feelings is seeing your stock's price go up. But how long should you let it ride before taking cash off the table? During a healthy market uptrend it's smart to take most profits at 20%-25%.


The 8 Week Hold Rule

If a stock has the power to jump over 20% very quickly out of a proper base, it could have what it takes to become a huge market winner. The 8-week hold rule helps you identify such stocks. When your stock reaches a 20% gain in less than three weeks, hold for at least eight weeks.


IMO, the most important thing when it comes to trading (or investing) is to have a rule set (the one above or some other) that you consistently use. To be consistently profitable, you have to have a consistent process or methodology.

I don't mean to offend or criticize anyone (I'm happy to see everybody making money however they manage to do it), but the guys on here whose "strategy" is to just follow hot penny stock tips from anonymous posters here or on Reddit or Twitter don't have a real strategy. That's truly just gambling (and doing it without any sort of probabilities or basis). Card counters gamble, but they're using well thought out probabilities. That's why casinos hate them with a passion. As traders, we're allowed to "count cards"... if we choose to.

Hope that helps some.

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When your stock reaches a 20% gain in less than three weeks, hold for at least eight weeks.

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gold medal advice right there