Home Trading Strategies How To Average Into Your Losers (It’s Not What You Think)

How To Average Into Your Losers (It’s Not What You Think)

82
0
How To Average Into Your Losers (It’s Not What You Think)

hey hey what’s up my friend so in today’s episode I want to talk about how should you average into your losses so for those of you who are not familiar with what that means it means that as the market moves against you right you continue to buy even more let’s say you buy a stock at $20 then the market drops right the stock price is now trading at 10 loss you buy even more stocks at $10 so you can see that as the price goes against you as the market go against you you’re buying even more so this is what we mean by averaging into your losses right your first position position is in a loss you buy even more as it continues to move against you so before we talk about how to do it right on the first and foremost share how not to do it so most traders they make the mistake of averaging into their losses based on emotions as the market move against them right they want to average in do their losses because they think that as the market makes a bounce right a slight bounce it could possibly get out at a much lower price and break even let me give you an example let’s say you bought a thousand shares at $20 then the stock price collapse to $10 and let’s say you buy another thousand shares so at this point of time right you have 2,000 shares long of this stock let’s say stock e however if starting now were to rebound from $10 to $15 you’re able to get out and break even can you not average into your losses if you did not every in your losses though the stop price have to go from $10 to $20 then you can get out and break even but if you ever change your losses you can see that you could go get out at breakeven and a much lower price at $15 so if you do the math you’ll see that that is a true but the problem with this everything into your losses approach is that if you do it without a plan you do it without proper risk management you could lose more than intended so initially right you are buying a thousand shares at $20 then you average in it another thousand shares at $10 if you think about this right now you’re controlling 2000 shares and if the market doesn’t bounce higher if you continue to move against you your losses are amplified further and that’s very important that’s something that you must be aware of averaging into losses is financial suicide if you have no idea what you are doing or you are trading based on emotions so now the question is when should you average into your losses and how do you do it well there are three circumstance right that I would say warrants right averaging into your losses and more and first and foremost you have to manage your risk you have to know how much you can potentially lose before you consider averaging into your losses so first circumstance is this you can average into your losses right when you are for example take a manage of a crisis opportunity so as of right now we have the Kovac crisis right a lot of asset prices around the world they’re plummeting like a rock oil for example right now trading about 25 dollars and if you think about this oil cannot stay this low forever because once the man come back demand for oil will go up so right now is about $25 and I have no idea where the bottom is I can’t predict how low oil can go so what I could possibly do is to let’s say I have let’s see for example I want to buy some oil let’s say at $50,000 in capital to take advantage of this opportunity but since I have no idea how low oil could go I could put in the first $25,000 at $25 when oil is trading at $25 and if let’s say it oil drop due for example $10 I can put in the remaining 25,000 to buy oil at $10,000 so you can see that from the start I’m really prepared to lose or rather to risk a fixed amount of money on oil it’s all part of the plan I’m not I’m no longer you know gambling or trading based on emotions it’s all part of a plan I am really prepared right to set aside this amount of money to invest in oil so this first one crisis opportunity and you have no idea where the bottom is we can you know enter in trenches for example after the price or asset drop 40 percent you enter one time it drops 50 percent again the second time you drop 60 percent can enter at time but before you can even execute this right you have to know how much money you’re willing to risk very important circumstance number two right back to trading so you can also enrich your loss right when you are trading let’s say at support resistance an area of value train line moving average whatsoever and this area of value is very wide so let’s say you’re about to shot let’s say all right let’s see owned by some Amazon stocks and it’s coming into an area of support however this Amazon stock right the area of support is not very clear-cut it’s not like a very clear obvious price level like a high rollers maybe the area of support is between 120 and $100 is the $20 area and you have no idea where am I Amazon is gonna find support so what you can do is you can again right you can average into your trade so let’s say Amazon comes in 202 in your list and you don’t miss the move you can buy let’s say you know certain amount of shares that hunt Winona’s then if the Amazon continues further down to her dollars you can average in your losses and continue buying Amazon because it’s coming to this area of support however from for trading you have to know when to cut loss eventually the price could just you know smash through support and go even lower so you have to have a predetermined point right to exit the trade right if Amazon you know collapse to low let’s say your $90 is a point where you know it’s your last line of defense if Amazon reaches that price point you will exit all your positions that could be done as well right so in this case you are trading an area of support but because support is a white area right you can average into your losses as the price continues to move against you but again but you must have risk management in place you must know at what point to cut all your losses so for example let’s say you are used to in or risking 1% on each tree so if Amazon first time comes to hurt you in your list you could risk 0.

5% and maybe stop loss at $90 and if Amazon comes to hurt others you can risk the remaining 10.5% and your stop loss still in $90 so in this case if you get stopped out right the total loss to your account is only 1% risk to your tree ok so moving on right the last circumstance right then you can use to every to losses is what we call dollar cost averaging so this is a very popular term investing so what you do is that every man you buy X dollars of an asset so let’s say for example the spire at the S&P 500 index so let’s say you have no idea where is the top where is the bottom every man what you want to do is to simply dollar cost every try into this ETF so let’s say you can buy $1,000 of our spy every month right so a surprise whether it goes up or whether it goes down you just average into that position into that trade so what this does right is that you get the average price of this ETF the Spira over the long run so in the boom market you will buy as clearly and a bear market since prices are low you will buy more so this is a kind of like a systematic way to actually create or to invest right in the u.

s. stock markets and this is this dollar cost averaging is kind of similar to averaging into your losses especially when the markets are in in the bear markets okay I hope that makes sense so with that’s it I have come towards the end of today’s episode and I will talk to you soon you

LEAVE A REPLY

Please enter your comment!
Please enter your name here