Averaging down (DCA) & when do i decide to do it?
So first let me explain averaging down (dollar cost averaging) - to buy more shares of a stock when it drops under the price you originally payed or the average paid per share. Averaging down helps in a major way when a stock price you own is dropping because instead of selling at a loss if you buy and add to the postion not only do you bring down the average price paid but when the price starts to climb it'll help you break even sooner and also make a gain quicker. 1 downside that does come with avging down is that if you do it to early and the price keeps falling then you'll lose money a bit faster as well so you have to know when its the right time to do it. Before i go on lets look at an example
You bought 10 shares @ $5.
and the current price is @ $3
Now how i avg down is i always try to buy the same amount of shares that i currently own, this isnt necessary though, i only do it becuse it makes it much simpler to figure out what the price will change to before i buy. So if i bought 10 more shares @ $3 then i woud own 20 shares @ $4
How did i figure it out? If you always buy the same amount of shares that you currently own then this will always be the formula,
(current price paid per share) + (price of shares that will be bought) = (Total) divide by 2
and again because i bought the same amount of shares all i had to to do was
$5+$3=$8
and then divide $8 by 2= $4
So i would now own
20 shares @ $4.
The benefit here is instead of waiting for the price to go up to $5 to break even, i just have to wait till $4 to break even allowing me to hit a gain sooner as well. You can always buy a different amounts it nots necessry to buy the same you currently own it just makes it easier to figure out.
When do i avg down?
I dont have just 1 answer, but ive typed out how much of a difference i wait for before avging down
$0 to $1.99 - I really try to avoid buying any stocks that are in this price but on the rare occasion i try to wait for a 30% difference at least
$2 to $5.99 - at least 20%
$6 to $10.99 - at least $1
$11 - $29.99 - at least 10%
$30 and up- it depends
Not just $30 and up but all the other prices i covered depend on the reason for the drop in price. Before avging down you need to research and find the reason behind the drop. Avging down will do more damage if you buy when the price is dropping and it continues to keep dropping so DO NOT FORGET TO RESEARCH!
Is it smart to trade against the trend though?
There's many people who will say averaging down isnt smart to do especially when a stock just keeps dropping and that it's far better to add on to your winning positions as they go up. But im a swing trader, succesful one at that and i'm not here to say this is better or that that choice is worse and so on. I understand the concept of adding to your positions as they climb and it's a move if you're a long term trader. But as a swing trader who just holds short term, avging down lets you take advantage of the volatility & when done correctly after doing the research and feel confident the price will climb again, it helps make money more often than not, in facrt most of my gains have been earned because i avged down.
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