Averaging-Down: A Skilled Strategy
Averaging-down is a strategy to lower your average cost in a stock that has dropped in price. Question: Is this a truly good maneuver, or are you just chasing a botched trade?
The answer depends on your skill level.
Here’s how it works. In a typical averaging-down situation, you buy 100 shares at $50 per share, then the stock drops to $49 per share. So you buy another 100 shares at $49 per share, which lowers your average price to $49.50 per share.
On the surface that sounds like a good plan, but now you’re trading a 200-share block. Overexposure just became a real issue, and that’s especially true for amateurs. Beginners aren’t ready to keep on averaging down, which means 300 shares, and then 400 shares, and so on and so on.
The key to successfully averaging-down is to have a shrewd, careful plan. Amateurs might start with smart strategies, but things can get ugly fast, because when they add more shares to a trade, they may forget their overexposure. I’ll address that issue right here and now with a loud and clear proclamation:
Go ahead and make another sign for your wall out of that.
An amateur must struggle to consistently profit when only trading lightly. That means 100-share blocks. He doesn’t possess the expertise to execute complex maneuvers. Averaging-down is a professional device. A beginner might try it and get lucky a ...