Averaging Down as Part of the Good Strategy
There are many strategies out there being employed by many traders. After all, the internet offers a vast wealth of information ready at your fingertips especially to make money trading options.
What kind of trader are you? Are you the adventurous type that just trades whenever the opportunity presents itself? Or are you a more cautious trader that you take your time to get the best possible profits, even though that chance might not come up?
I believe that every trader has their own style based on their personalities and also to the degree that they can manage risk.
That being said, there is a trading strategy that is commonly used, but is it a really good strategy? I am talking about Averaging Down and it is something that is done by many traders. In this article, I will talk about what this is and tell you if it is a good tip or not.
What is “Averaging Down”?
So what is this term exactly? Well, Averaging Down in trading means that you buy a certain stock and when you see that the price starts to go down, you buy more. Because of this, the price of your shares go down as well, so you’re left with little to no profits in the process unless you wait it out until the price goes up high again to sell it for a higher price as well.
Averaging down is a strategy that’s actually used by many traders today, but it doesn’t really mean that it is good to follow.
You see, the problem here is that most people who are averaging down do so only because of being more reactive instead of looking at the situation with a level head.
You have to understand that the market moves in unpredictable ways. If you average down and the prices do get up, you could definitely strike big because you have plenty of that stock. However, what if the prices never go up? You’ll lose a lot in the process.
The main reason why this strategy is still so prevalent, however, is that it is a nice option to take if you just want to create multiple entries for a possibility that you will strike big.
Yes, there is a chance that the prices won’t go back up to the level you’ve expected it to rise, but there is also a real chance that it will.
Always remember that no one can really predict how the market moves. It is up to you to use whatever measures you can to ensure that you’re going to get the bigger slice of the cake in the end.
With that being said, this is not to say that averaging down is entirely bad, but do not use it reactively. Instead, use it as part of your strategy; treat it as a tool that you can use to repair your stock portfolio or something.
In the end, it is totally up to you. That is why it is encouraged that you make lots of decisions while trading.