by winston » Sat Jul 11, 2009 10:16 pm
The discussion below applies to Equities only and not to highly leveraged vehicles like Warrants & Futures:-
Averaging Down has been a source of my biggest mistake as well as a source of my biggest profit ..
Biggest Mistake is what MM described above. Where's the bottom ? Just when you thought that there's a bottom, there's a new bottom. However, I thnk that I made that mistake when I was blindly averaging down. If I have done my homework, I would have noticed that business fundamental have detiorated and I would not have averaged down blindly..
Biggest Profit is as follows:-
When one is averaging down on a losing position, it means that one did not cut everything in the first place.
In my case, I normally dont cut everything if a stock's fundamental is intact, even though the market direction could be downwards. That's because I want to continue to follow it's story. I want to buy later when it becomes very cheap..
If I cut everything and dont have a position, I dont have Sensory Acuity. I dont notice it's price range, it's trading volume, it's earning results, it's competitor' results, insider buying or selling etc.
So right now, I do the following:-
1) Have a mental Stop Loss
2) Depending on the situaton, I may cut a portion when the Mental Stop Loss is exceeded
3) Continue to monitor it's story, it's competitor's story, announcements, insiders buying and selling etc.
4) Weekly Decision on whether it's fundamental is intact. If not, then sell another portion or the rest
5) Constantly ask myself whether my money is being put to good use on this counter or to switch to another counter or Aset Class or Currency or Industry ..
6) If it's business fundamental is intact and it has dropped a fair bit, I may start averaging especially when I see the market trending upwards
Again, I try to control my risk by Position Sizing rather than thru a Stop Loss
It's all about "how much you made when you were right" & "how little you lost when you were wrong"