Not long ago, a fellow trader asked me about a strategy for averaging up for stock trading. Here's the question:
Sir, what is the right time and situation to average up the stocks we hold?" If you don't understand what averaging up is, you can re-read what I wrote here: Averaging Down and Averaging Up in Stocks.
POSITIVE SIDE OF AVERAGING UP
Average up has positive and negative sides. On the plus side, if you can average up, that means you've bought stocks in an uptrend. You increase the share of shares when the stock is uptrend is good.
If your stock continues to rise, then your profit will also get bigger, because the number of your lots continues to grow.
NEGATIVE SIDE OF AVERAGING UP
While the negative side of averaging up there are two. First, by continuing to averaging up, then of course the average price of your shares will be higher. So that you don't get confused, take a look at the following averaging up illustration:
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| Stock averaging |
We can see in the table above. Initially you buy ANTM shares at a price of 1000 for 10 lots. Since you only bought the stock once, your average price is 1,000. After that, ANTM's share price rose to 1.025. Then you decide to buy another ANTM at that price as much as 17 lots.
Then, ANTM rose to 1,050. You are averaging up again by 10 lots. Third, after ANTM's uptrend is back to 1,100, you are averaging up by 30 lots. So, your current average price is 1,058 as much as 67 lots (originally your average price was 1000 for 10 lots).
The number 1,058 is obtained from (1,000,000 + 1,742,500 + 1,050,000 + 3,300,000) / (67 lots x 100 pieces).
If then ANTM's price goes up again, say up to 1,200, it doesn't matter, you will get more profit. But what if ANTM suddenly reverses direction from the price of 1,100. ANTM continues to fall until 1.070, and continues to fall until 1.040?
If ANTM has dropped to 1,040, then you are now no longer in profit, but already a floating loss, because you have averaging up three times and your average purchase price is now 1,058 (if ANTM drops to 1,040, of course you are now floating loss, right? ).
In addition, your floating loss will automatically increase in nominal value, because the number of your lots is now getting bigger.
Well, but if you don't averaging up, then when ANTM drops to 1,040 for example, you still profit (your average price is still 1,000), and maybe you can consider selling ANTM profit if you think ANTM will continue downtrend.
The second negative side, averaging up can cause you to be greedy. If you continue to buy a stock when the price is rising, this indicates that you are eager to make a large profit.
This is not good for your trading. Unfortunately, this greedy nature makes you blind in analysis. Most traders who are averaging up continuously, traders don't realize that the stock is about to go down, so what often happens is, when the average price of your stock is high, and the stock price actually drops, you who previously made a profit, actually become a floating loss.
CONCLUSION: CAN'T AVERAGING UP?
Of course you can, but you have to do it fairly. I advise you to averaging up when your stock is at least a floating profit of about 4% of your purchase price.
Don't averaging up if your stock has only gone up a few points, because when your stock has only gone up a few points, then you don't know the next trend, whether it will go up again or reverse a correction, unless you are sure about your averaging up.
Second, you also have to pay attention to the momentum when averaging up. That is, averaging up should not be done as long as it is done by buying when the price goes up. Pay attention to the analysis of trends, market momentum, and support-resistance also formed in the stock.
Third, averaging up with reasonable capital. Don't be greedy when averaging up. Do averaging up as much as you can, and try not to do averaging up too big. For example, you buy shares at a price of 1000 for 10 lots.
Then you immediately averaging up at the price of 1,050 as many as 80 lots. It's a good idea to averaging up with the same number of lots, fewer or several lots larger than your first purchase price.
My advice, in doing averaging up, consider carefully your decision, because in many cases where averaging up is done too often it causes large floating losses when the stock price turns into a correction or even a bearish trend.
