Never Average Down in Stock Trading!

"Everyone loves to buy stocks; no one loves to sell them. As long as you hold a stock, you can still hope it might come back up enough to at least get you out even. Once you sell, you abandon all hope and accept the cold reality of temporary defeat. Investors are always hoping rather than being realistic. Knowing and acting is better than hoping or guessing" (William O'neil)

In my earlier post about Business Plan for Trading, it was stated that one of my rules - never average down. For traders, the tactic to average down is rather popular. The simple definition of average down or dollar cost averaging is as follow:

"A strategy used by investors to reduce the average cost of shares, in which the investor purchases more shares with a fixed amount of capital as the price of the shares decrease. The investor receives more shares per dollar and decreases the average price per share." 

In the nutshell: when the stock you hold drops in price, you buy more because the price is at a discount.

If you believe in averaging down, and so far it works for you, by all means ignore this article. I am writing out of experience. In my early trading days, I kept buying a stock until I realized 45% of my capital is out there in ONE stock! And out of fear losing a lot of money, I needed to keep it for a long period of time!

Here are my arguments, based on sharing, reading books, and my own experience. Think about these points and ask yourself if they make any sense not to average down in you stock trading.

1. By averaging down in a stock, you are risking yourself because you would never know how long the downtrend will stop and reverse in you favor. Never predict market, let the market shows you the top and bottom. If many cases, the downtrend will carry on and takes so long (months!) to trend up. Do not risk you money in something uncertain.
2. By putting a good money after bad, you are actually incurring a huge opportunity loss. What I mean is that, instead of allocating you money into stocks that are downtrending, you could have utilize it for other stocks, that could have given you more profit than the stock you are averaging down within the same period.

So, again, think about this. My advise is simple, follow your system, apply a strict cut-loss policy, and do no average down.

Happy trading!