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FOR TRADERS --- AVERAGING DOWN ON THE WAY UP
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
Time is the great revealer
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Member
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.
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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...
Death will be reality, Life is just an illusion.
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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
Time is the great revealer
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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
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Member
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.
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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
Time is the great revealer
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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...
Death will be reality, Life is just an illusion.
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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
Time is the great revealer
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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
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