Averaging up??
Hi all,
So Naked Trader, recommends avoiding averaging down on a share price (which makes sense to me, assuming its part of a downward trend and not a spike) now I know some people will disagree with that and that's fine.
But what about averaging up, does anybody have a good rule of thumb?
What I did last year was that once a company had gained 10%, I would buy more (assuming I had money available and that a better opportunity wasn't available) the amount I would buy would usually be about the same as what I bought originally (£1000 to £1500).
Appreciate hearing any alternative views on this gut feel says my 10% feels right as in theory the profit pays for the commission, stamp duty and the spread of the new trade and hopefully means your still making a profit (albeit less than you had previously).
Welcome to be told I'm wrong or someone point out a staggering flaw in my logic, as I've said before I'm fairly new to investing and this is my first year of taking it seriously and it's the first time I've been in a community where I feel able to ask and get sensible suggestions.
Cheers
Andy
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4 comments
I've noticed that the emotion of seeing something you hold fall is the same as seeing something you don't hold (but had considered buying), or don't hold much of, rise. The effect of clinging onto a loser is a kind of mental paralysis, which is one reason to sell that share. I think there's a similar fixation when watching the escaping winner: better perhaps to average up and allow your brain to start working normally again.
Personally, for discretionary accounts, I have always liked to 'pyramid up' with positions. I took this advice from Bill O'Neill's "How to Make Money in Stocks" book as well as others by Nicholas Darvas, Gerald Loeb etc.
Essentially you start a position small, and if it rises you buy more in decreasing increments. After 5 buys you have your full position size. If the stock goes down, you don't add, and often you just cut your losses. It's not for everyone, and not what I would recommend in systematic strategies, but it works very well in trading accounts. You minimise exposure when your trade thesis is wrong. It helps to put in practice the maxim of 'running your winners' and 'cutting your losers'.
hi, yes, I agree with the principle, although I think that works better if your buying 2 or 3k of shares at a time as your dealing charges are correspondingly small in percentage terms.
Interesting that he has 5 buys as the limit, I may give that a go this year..........will read his book first ;)
I can also see how this would work very well with spread betting (is this what you mean by a trading account, also what do you mean by discretionary account)?
There is nothing wrong with averaging up (or with the alternatives - hold to let a winner run, sell to take a full profit, or top-slice to take a partial profit). The issue as I see it is whether there is really no better investment to be made elsewhere.
You must have genuine confidence in the company's upward trend or its growth prospects if you intend to increase your investment in it. It is also sensible to be clear in your own mind as to when you average up - either due to a 10%, 25% or 50% increase in the share price, a favourite technical analysis setup or good fundamentals. The market should be bullish and the company's current share price should be above the 50 day SMA or the 55 day EMA.
Although some traders/investors would average up with an equal number of shares, or an equal cash amount, as per their initial investment, bear in mind that it is a little safer to average up using a lower cash amount than before (so your average cost per share doesn't get too high) just in case the share price reverses.
Just my thoughts on the subject.
Ian