Far and away the worst error anyone can commit is to add to a position that is a loser. There is no worse curse than making money while violating this cardinal sin of trading. We are only setting ourselves up for the one that doesn't come back. Averaging down, as it is called, means that we are going against the grain of the market. Our initial decision was wrong, and now it is compounded by our hoping that the market won't have to come back much in order to show a profit. For example, we initially purchased ABC at 20 and now it is selling at 15, and we decide to buy more. We would be guilty of adding to a losing position. The converse is true for the short side. We are hoping that the trend of the market will reverse soon in order to prove our initial decision right. In essence, You are saying, "I know that the market is going to turn and prove me correct". Sometimes it does. But when it doesn't, major hemorrhaging quickly ensues. First we must recognize the weapons we are using to sink our financial ship in the murky waters of the market. Only when we see that we are our own worst enemy, we can move on to the process of extinguishing the fire from our dealings with the market. Doubling down is predicated on the hope that the market will reverse itself. It flies in the face of the trend at that moment. Who says that a market has to reverse itself? Just because something that once sold for 80 now sells for 40 doesn't make it cheap or a bargain. We double down because our egos do not like being wrong. It does not like to admit defeat. It tells us to hold on, double down, do anything but admit that we are wrong. Our ego will invent the weirdest rationalizations for adding to the losing position. It will go through strange mathematical constructions showing that because our average cost is lower, we can get out profitably with just a slight reversal in the trend. But who can know for sure when that reversal will come? Don't let your ego trick you into believing that doubling down is a winning strategy. Once you relent to its demand, it will blind you, preventing you from looking directly at reality. You will want to feel right no matter what the cost. In the end, you would rather be right than make money.
Don't doubling down? For day trading or short term trades, indeed a bad idea. I have tons of losses to prove it is a bad idea. For long term buy and hold, maybe it is not a bad idea as the assumption is we buy undervalued and wait for price to catch up. Shouldn't we buy more if it is more undervalued? The concept of undervalued doesn't exist in day trading.
WOW.. the concept of value is very important in day trading. Price is just an advertising mechanism. Price is nothing without knowing where the majority of the action/auction took place. Value is very important.
Like how much "more undervalued" are we talking about? Suppose you got in at $50 and it's now trading at $25. That's 50% discount, so it must be considered a real bargain, no? If you're a successful trader/investor, however, you wouldn't allow the stock to fall as much as 50% in the first place. Here are the basic rules all successful investors and traders must follow in order to profit in the market IMO. These rules are (in no particular order): Don't pick tops or bottoms. Cut losers fast. Never add to a loser. Let winners run. Add to a winner.
Would number 1 be more accurate as:dont trade at tops or bottoms,require the stock to prove itself? After all,no ones ever refuted 'buy low,sell high'.
And yet, I don't think anybody would say "buy low, sell high" is the same thing as "picking the exact bottom and exact top". Just because you think the stock is overpriced, that doesn't mean it can't go higher, and vice versa for low priced stocks. That said, there are reversal patterns like ABCD and 3RB you could use to spot reversals. But as you correctly stated, the best course of action is to "let the stock prove itself".
"A body in motion tends to stay in motion unless acted on by an outside force". — Newton's First Law of Motion When a market is moving in one direction, it is more likely than not to continue to move in that direction. To get in its way is to swim against the river. Usually when we swim against the current, we get very tired and don't go very far. Sometimes we even drown. That's the way it is in the market as well. He who fights the current of the marketplace won't get very far. Sure, we've heard about contrarians who made money fading the crowd. In reality, however, they made money only because the market changed direction. But what happens when it doesn't change or it takes years before a turnaround? Undoubtedly, they will have wasted a lot of time and money. There is no need to take a position until it is time. So, when is that time? How do we know when it is time to buy or sell? Perfect timing is impossible. If we try to buy or sell against the trend, we are relying too much on luck. Sometimes you read or hear about people claiming they bought the exact bottom or sold the exact top. Ego loves to play this game of picking the top and fishing for the bottom. They have obviously been very lucky. However, luck can carry you only so far. Eventually the market weeds out those who rely on luck to survive. At the end of the day, the river always win. You're better off just swimming with the stream. Anyone who gets into a position too early is crystal-ball gazing. Instead, let the market tell you what to do. Allow the market to speak to you in one language—price. Prices that you can easily recognize and differentiate. More than likely, you have been listening to a different voice all along: your ego. It's time to turn your attention to the only expert worth following: the market. Forget your voice and listen to the clear message given by the market. Put full faith in your ability to follow the market (ie. go with the flow), and not attempt to lead the market.