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View Full Version : FOR TRADERS --- AVERAGING DOWN ON THE WAY UP



whiteheron
30-12-2004, 08:25 PM
Much has been written and discussed on the subject of averaging down , but this invariably refers to averaging down on share prices that have dropped

Because of tax implications what I am about to put up is not for the long term investor but for the trader

I have been taking an entirely different approach to averaging down , one that I have found to be much more successful and rewarding --- that is averaging down on the way up , or averaging down on winning positions
It is generally not too difficult and it works , especially on fairly volatile stocks

To demonstrate , one company that I used it on very successfully was Oxiana (OXR )
(the figures will only be approximate , but they will be perfectly good for explanatory purposes )

Firstly I purchased shares at about the low 80c mark
When they reached just on $1 I sold feeling that they would retrace somewhat and they did
This gave me the opportunity to re purchase at prices averaging just under 80c
I then sold at prices from just over 90c to just over $1 at which point I decided that they were fully priced
I would have re purchased at about 90c but they did not retrace that far

The overall result was that I came out with a rather healthy profit , a far larger profit than I would have achieved had I simply purchased at about 80c and sold at about $1

Conclusion
It is far better to average down in the manner explained on WINNING trades and steer clear of averaging down on losing trades --- quit them quick and move to winners

I am not trying to blow my own trumpet here ( I have losers too ) what I am trying to do is promote healthy discussion on differing trading techniques

If anyone else is doing something like this I would like to hear from you
All thoughts and ideas will be greatly appreciated

Longtack
30-12-2004, 10:46 PM
Me too - with NOGOC. It was a good trading stock for the last few months until recently as the volume was too thin for me.
The retracements are the key and I posed a question to the ST masses on Fibonacci retracements. Did my own research eventually. WHS was another goodie around $5-$7 odd and pleasing to see the increase in volume held at the last sale when compared with the first.
Only workable for me in a clear uptrend.

Steve
02-01-2005, 10:12 AM
quote:Originally posted by Longtack

Only workable for me in a clear uptrend.


Yes, it has worked for me too. A clear uptrend is a must. There has been some good research on this. I will try and dig some up...

whiteheron
05-01-2005, 01:22 PM
Steve

Thanks --- I have been trying a few "google " searches to see if I can find anything on what we are discussing here

There is quite a bit on "dollar cost averaging " and a bit on "averaging down to reduce the cost of an investment " but I have not had any success in finding anything on the particular technique that we have discussed above

duncan macgregor
06-01-2005, 10:21 AM
Might not add much to what has been said so far,but i average up all the time. I only place a 50 pc stake in a company and add to it each time it improves by selling in total my worst performer. The trouble with that i find is, you have a narrowing range of winning stocks that requires constant research to find replacements. I like to have only five stocks at any given time, with the highest percentage invested in the one trending the fastest. Most of my buys are longer term at the start. The trick is to understand when to move on, and when to come back. I also like to have a TA play for fun now and again, it assists in teaching me when to buy and sell. My long term holds in place at the moment are PGG and TPW, with a bit of nog as a play. I am looking for a couple more, but why throw out an ace and pick up a jack. macdunk

zyreon
06-01-2005, 05:45 PM
You can average down or up successfully depending on your investment philosophy.

well chosen examples:
Warren Buffett; would buy more if price went down, as this would make the incorrect market valuation even more incorrect.
George Soros; would buy more if the price went up(or down if short), as this would suggest that his hypothesis is correct.

another thought on averaging up: if you trade with margin a/c you can use the increase in asset value as collateral for further loan, steadily increasing your holding as the price is going up -- with due risk management of course.

whiteheron
06-01-2005, 09:02 PM
Interesting replies folks , but it seems that not too many of us are adopting this approach or variations thereof

macdunk
You raise some interesting and valid points
Your strategy of buying 50 % and adding thereto when the price improves has merit --- a little bit of insurance and only a very modest increase in cost once the stock proves it is headed in the right direction
I do pretty much the same as you and strike similar problems (if you can call them that )
I weed out my worst performers regularly , sometimes at a modest loss and sometimes at about break even
At any point in time I carry about ten stocks but , as I lean towards the relatively short term (a few weeks to maybe six to eighteen months ) and deal mainly in mining/resource stocks, I have an ongoing problem of finding new stocks to replace those that have had a good run and been sold , or fizzed with the same result

Your challenges closely resemble mine
I must admit that although I can usually buy well , when it comes to selling I am often inclined to sell too early only to see a stock continue a good run
One of my challenges for 2005 is going to be to overcome this . I guess it can hardly be termed a problem if a stock has provided a handsome return but it is something that I need to put some work into , but maybe it is not such a bad thing to leave something for the next fellow !

Yes , it is easy to throw out an ace for a jack (or worse ) so one must not undervalue the top performers , after all they are not that easy to come by

One thing I am tending to do more of now is to invest more heavily in a stock once I am convinced that it is a top performer
This also allows the flexibility of selling off a portion on what I perceive to be the highs , buying back when the price drifts , as it is inclined to do with the stocks that I follow

Its all quite fascinating stuff really , especially after 44 years of work and a couple of close calls with poor health

Steve
07-01-2005, 04:22 PM
quote:Originally posted by whiteheron

...when it comes to selling I am often inclined to sell too early only to see a stock continue a good run.
One of my challenges for 2005 is going to be to overcome this. I guess it can hardly be termed a problem if a stock has provided a handsome return but it is something that I need to put some work into

Likewise, this is something that I am planning to work on this year. My problem is that I sell too early, more often than not because I try and second guess my trading system. IE: a lack of DISCIPLINE...

whiteheron
07-01-2005, 05:11 PM
Steve

Maybe judicial use of "stop loss " orders as a share price increases is the answer , but I have not convinced myself of this yet

I tend to leave my stop loss settings sufficiently below the share price so as not to be stopped out because of the normal market "noise " on the basis that I will not get stopped out unless something pretty serious happens ( still leaving me in a winning position though in most cases )

The problem for me is that at some stage a share must reach or appear to reach its potential top price for the time being ( or very close thereto ) so that I can sell and move on to (hopefully ) greener pastures , but as macdunk has stated it is easy to give up an ace for a jack

Looking on the brighter side however , this is a better problem to have than the one of trying to "average down " on a stock that is sliding down a slippery slope (been there , done that --- its a no brainer !!! )

I have concluded that I am much more adept at picking the entry price than the exit price

Has anybody solved this one ? --- if so please give us the oil

duncan macgregor
08-01-2005, 08:42 AM
WHITEHERON, I have been setting my sell stop loss with time and price. Time is equally as important as price in my opinion.
A sp might stall for a considerable time not showing a monetry loss but showing a time wasted loss. Time is money if you run out of time you are not earning money. To counteract a time stop, i draw a treadline in advance of acceptical time gain, and unacceptical time gain. When a share drops under my time chart, i get out. It is not a stop loss but a time stop. Most good stocks rise, and stall then rise and stall over time. Recent time exits for me was HQP, and more recently POT. Both are good solid companies that made good gains, but broke my time stop while still on an uptrend. I find that is my way of getting out of a share that goes sideways for to long which is a complete waste of time. macdunk

Steve
08-01-2005, 11:59 AM
macdunk, are you able to post a chart demonstrating it in action?

whiteheron
08-01-2005, 12:22 PM
macdunk

Yep , time is money

I generally take a good look at my holdings about once a week and weed out those that have stalled for maybe a month or so
Nothing too technical at this stage , I just know which ones are dragging the chain

Your idea of the time stops is good --- it allows you to change to stocks that are on the move , quitting those that are going nowhere(at least for the time being )
There is always , of course, the chance of re purchasing a good stock again once its time in the doldrums is up --- eg POT , a top stock that I sold out of too early ( but at a healthy profit nevertheless , and this is what it is about at the end of the day )
Once I get over this short to medium term trading that has gripped me for the present I will be looking at stocks like POT , at the right price of course
In my opinion it is essential to buy in at the right price
I dont go for this time in the market being important stuff ;
I believe it was most probably started by Brokers to explain away getting clients into the market at wrong phase of a cycle
As it can take many years to recover from a purchase at the top of the market , even with a good stock , what a waste of money and opportunity !!!

Another matter that is of more than a little importance to me is brokerage
I trade on line via ASB Securities ; they are okay and their staff are always polite and helpful , but I feel that some of their systems could be improved
At $30 a pop I figure that I pay ASB Secs something like $500 to $1,000 per month depending on activity at the time , a not insignificant overhead cost
They wont give me a discount as they say this is their rock bottom price
It costs me about 1 % on average to buy and sell ( 0.5 % each way )so it is not too bad , but if I could trade double the amount each time I could cut this in half so I am looking at this option
Now that I have improved my good / bad trade ratio markedly I think I will give this a go
The money saved would be better in my pocket than the Brokers

There is never an end to learning in this game and there is never a right or wrong way to do things --- but if we achieve our goals thats pleasing

duncan macgregor
08-01-2005, 01:10 PM
Steve, I am too simple a chap to do that, but i will explain best i can, with examples. I set my sights on 20pc plus dividends or better as my bottom line. I select my company in my normal way then go back to what the price was six weeks previous, and that is my bottom line which must increase by 20pc pa. My time line starts at that lower level and must trend up at 20pc or more and trails under the share price. If ever the sp drops below that line then i am out of there.
When a share price stalls, my time line or my stop loss will tell me to sell. This system got me out of a share before my stop loss because lots of times the sp will level off and stay there without dropping low enough for a stop loss or trend up at a very slow rate. MHI is a good example over the years trends up and stops trends up and stops. HQP, POT, AIA, were all sold with my time stop when the trend slowed off. Selling was my big problem, timing the sale. I found that was where i missed out. This way i find makes the decision easier. It is better to get out and buy back in later when it starts going again. MHI did nothing one year then started trending the next year. Sometimes with a high trending share i adjust my time line higher if it gets to far under.
happy investing macdunk

KJ
08-01-2005, 10:48 PM
I am new to short term trading and have been trading in the last few months-I keep this separate from LT portfolio.

I have completed 3 trades-I only trade in stocks that are in a strong uptrend and therefore I buy high and sell higher.In other words I attempt to buy when a correction takes place and sell quite quickly.

Between Oct and Dec I have bought and sold FBU,RYM, and EBO-often it appears that stocks that pause (and fall back slightly)tend to move up quite quickly initially when they move again.
This brings me to Macdunk's point on length of time in a trade.In each of the trades that I mentioned margins were FBU 15.2%,RYM 8.7%,and EBO 6.8%. RYM was the best trade as it ran for 3 wks.
In each of these cases the first 3 to 4 weeks was where the quick gain came from.

As I said I am a novice at trading and still working on my game plan.

Dazza
08-01-2005, 11:15 PM
macdunc
so 6 weeks back u check to see if it went up 20%? or 20% pa?

if im not mistaken, they are 2 different things?

20% = 20%
20% pa = ... 6 weeks.. so thats 6/52 times 20% = 2.3%?

im sure u meant increase of 20%? just checking...

so if in 6 weeks.. the stock didnt move up 20%... then u will sell? a bit hard in NZL dun u tink?!

45south
09-01-2005, 07:36 AM
Hi there. I,m finding this a very interesting thread.
You sound like a wise one Whiteheheron,especially your posting on 6/1.
Unfortunatly I,m like a boy in a loly shop and like to have a bit of every thing.
ASX 10 stocks NZX 12 stocks
But I have a heavy weighting in about six. When I get a liking for one I tend to wade into it.Used to be Powerco.
Like you I have moved onto oz resource stocks. I don,t beleive China India or Asia in general is going to slow down.
I pick up most of my tips on these threads, go through Co records, then decide.
I don,t run stop loses.If a share drops I decide wether it has got the potental to come back and will hold eg AUO or sell eg BGR
If it stays flat eg HQP MHI I look at it the same way,
HQP has got the potential to rise, MHI is fully valued- undecided.
I,m defiantly not in to short term trading getting in and out of shares when theres 10% or 20% variation.Each Co on its own merits.
But I do make the odd bulls up. eg Bying BGR on the way down,but RPL has more than made for it.

Phaedrus
09-01-2005, 07:39 AM
Whiteheron,
The system you describe is not averaging down - even on the way up! The essential feature of averaging down is that [u]the original investment continues to be held.</u> Buying more shares whilst retaining your original parcel has the effect of lowering the unit price you have paid for the combined holding. This sounds good on paper, but you are better off to sell the original holding as soon as it is obvious that you have made a mistake. You then have that much more money to buy back in again when/if the downtrend ends.

You are doing a series of completely separate short-term trades that just happen to be with the same stock. No averaging down there! That's why I'm not criticising your system - only what you call it!

duncan macgregor
09-01-2005, 08:33 AM
DAZZA, The problem i had was holding a share that was going nowhere, or a complete waste of time. The share that goes sideways and wont even trigger a stop loss, how was i going to know when to get rid of it and why. I set my bottom acheivable line in time then decided that when the price crossed that line i was out of there, even although the trend was still up but at a slower acceptable rate.
The time line gets drawn on the chart in advance of the action, unlike the normal TA methods that draw the lines after. I still use my stop losses, and buying methods, but have added this time stop.
Lets take a play i am making at this very moment as an example.
NOG bought in at average price $1-08. In jan i decided the six week time was to volatile with this stock so went for a five pc instead. Therefore if from $1-03 to $1-24 in 12 months the price drops below that bottom line of then i am wasting time, and get out.
On the other hand if the stock rises faster than my time line then i re adjust it up to my stop loss level and take it from there.
I look on 20pc pa plus dividends as my bottom line or better.
macdunk

winner69
09-01-2005, 09:06 AM
quote:Originally posted by duncan macgregor

DAZZA, The problem i had was holding a share that was going nowhere, or a complete waste of time. The share that goes sideways and wont even trigger a stop loss, how was i going to know when to get rid of it and why. I set my bottom acheivable line in time then decided that when the price crossed that line i was out of there, even although the trend was still up but at a slower acceptable rate.
The time line gets drawn on the chart in advance of the action, unlike the normal TA methods that draw the lines after. I still use my stop losses, and buying methods, but have added this time stop.


Sell on a trend line break then ... same method as Phaedrus eh

So you really a TA man ... good on you

whiteheron
09-01-2005, 09:50 AM
Phaedrus

Thanks for that

I take your point about the completely separate short term trades , as each time that you sell that completes that deal and you start again later with an entirely new trade
Each trade is then able to be judged on its own merits

Sometimes of course I purchase a stock in two or three bites and then sell all together ( keeps those Brokerage costs down )

Dazza
09-01-2005, 04:49 PM
gotcha macdunk!!!! very smart indeed,

now antoher question.... macdunk are u a trader or an investor?!?!

or both?

cause with ur current strategy, it looks to me like your a trader? therefore paying capital tax.. of about 33%???

Dazza
09-01-2005, 04:53 PM
also ... sorry to not post this all in one posting.... but what program do u use to draw them?!

or do u just print it off and add a time line...

bigcharts is cool to use :D but i find its hard to adjust things etc etc

and thanks P for the info, will look into those free TA stuff :D

duncan macgregor
09-01-2005, 05:04 PM
DAZZA, 90pc investor 10pc trader . Both completely sep and in differennt names and companies. winner 69 is wrong it is not a sell on a trend like break but a time line break which is completely different in time and price.
macdunk

duncan macgregor
09-01-2005, 05:28 PM
DAZZA , sorry missed your last post. A time line is drawn in advance. Treadlines are drawn after the event. With a time line you know in advance of your action not after the event before your action. The difference is obvious. MACDUNK

Phaedrus
09-01-2005, 07:43 PM
MacDunc,
I would like to call into question your assertion that "A time line is drawn in advance. Trendlines are drawn after the event. With a time line you know in advance of your action not after the event before your action."

When you (MacDunc) draw a time line, you go back 6 weeks into the past and draw a line from that point, with a 20%pa slope, extended into the future. You can therefore see what price level your line will be at for any date in the future.

When I draw a trendline, I go back into the past and connect 2 reaction lows. This line is then extended into the future. I can therefore see what price level the line will be at for any date in the future. I know in advance exactly what price would be needed to trigger a sell on any particular date in the future - the same as you.

What is the difference? Answer - there is none, apart from the fact that I allow the individual stock to set the slope of the line (the percentage increase), whereas you use an arbitrary figure of 20% for all stocks.

winner69
09-01-2005, 08:32 PM
Phaedrus ... keep at it mate ... doing some interesting stuff .. but i wont bring up Telstra again

Thats exactly how i interpreted Macdunks theory ... exactly the same concepts

Maybe you had better post your charts with the 'time line' extended out a few months?

bull....
25-01-2005, 06:52 PM
Time line / Trendline agree same thing like many indicators the same thing but different name.
Heres a question for McDunk your timeline starts from a given point in time when it is crossed you sell this will work fine in a bull market when most stocks are trending only up but dear I say when markets are trading sideways wont you be in and out of stocks all the time and this system would end up being a failure?

duncan macgregor
27-01-2005, 07:05 AM
BULL, Different markets different strategies. In a bear market my time line, or line of expectation gets lowered from 20pc plus divies to perhaps 10 pc. In a market collapse for instance its money in the bank looking on. The difference with my time line with the other systems is this. It tells me at a glance if i am on track. It tells me at a glance what i expect the share price to be in the months ahead. It tells me how a share is doing in comparrison to the other shares i hold at a glance. The shares i hold have wide ranging share prices. It is not a where all end all, but a system i find that makes it simple and easy to follow. macdunk