Not long ago I received a question from a trader about how to averaging down in stocks. The content of the question is roughly like this:
"Mr. Heze, I read Mr. Heze's article about averaging down here. Which is OK: Averaging Up or Averaging Down? Mr. Heze said that averaging down is not recommended, but in some cases we can do averaging down if we have a solid foundation. . What kind of solid foundation is that, sir? Can you share your experience?"
This is a good question, and I would also like to thank colleagues who actively ask good questions like this. Especially those of you who carefully read post after post that I often publish about trading strategies.
Okay, enough venting.. So actually averaging down is quite risky, because you increase the share of shares when the price goes down.
Let's say you buy ASII shares at a price of 7,000 for 10 lots. I don't know that ASII dropped to 6,950, and you decided to buy again at 6,950 for 10 lots. This means that your current average price is 6,975 or lower, because you previously had it at 7,000.
This means you don't have to sell at too high a price to make a profit. The problem is now, if ASII's stock price hasn't gone up yet, but dropped again to 6,800, then your risk of loss / floating loss will also be greater, because the number of lots you hold increases.
If you have jumbo capital, it doesn't matter if you want to averaging down again. But what if your capital is small and very limited? Yes, it's most likely that your stock will get stuck if the price continues to fall because your 'ammunition' has also run out, right?
I remember in 2015 when global economic conditions were bad, lots of traders complained about getting stuck in large numbers, because they kept averaging down. And not a few traders end up cutting losses. This is the reason why averaging down is so risky.
But because in that post I wrote "in some cases averaging down can be done as long as you have a solid foundation", then that means you can do averaging down.
I personally have also done averaging down, and the strategy of averaging down was not bad. This means that averaging down is not something you should 100% avoid in trading. But again, averaging down must be done the right way.
To tell a little about my personal experience, I once bought PWON shares at a price of 610. To get a profit, at least I had to sell PWON at a price of 620 (after deducting the fee).
It turned out that PWON's stock price fell to 590. And PWON fell again to 570. I then averaging down 2 times at the prices of 565 and 570.
So the average PWON price I got was 580.33. A few days later PWON rebounded to 595, and I was able to sell PWON profit at 595. So with my averaging down, I didn't have to wait for PWON to go up to 620, but when PWON was at 595, I was able to sell profit.
"Then how do you do the correct averaging down of stocks?"
The first condition, averaging down you should not do in a state of emotion and panic. Remember, averaging down is quite risky. When your mind is in an emotional state, afraid of stock prices going down again, this will make you unable to think properly.
Finally, averaging down is done in the wrong way, by continuously buying shares until the capital runs out, even though the stock price is still falling.
Second, you should do averaging down on stocks that you believe in the stock's rebound ability. You can observe this from the support points of each stock and the candlestick pattern. Stocks that have been stuck at support, that's where you can start averaging down.
For this, it takes higher trading flight hours. The more experience you have, the better you will know when it's time to averaging down and when you can't averaging down.
It's the same thing when a trader asks me: "Brother Heze how do we see the stock market when it's busy or quiet? Is it from the running trade?"
I don't see that the stock market is busy or quiet from running trades, but from the movement of bid-offers for stocks that I usually observe, it can be seen that the market is quiet or busy. How do you know? Yes because I watch the stock market every day. So, the trading hours factor will determine how much your ability to make decisions, including in this context is averaging down.
Third, I don't recommend averaging down on third-tier stocks, aka fried stocks, because fried stocks are (very) dangerous. In my experience, I did averaging down several times ONLY IN LQ45 STOCK such as PWON, BBRI, AKRA, BMRI and others. And indeed stocks proved to be rebounding soon after they touched a certain support price.
In this post, you've got an important strategy for averaging down stocks: If you want to averaging down, don't be in a state of panic/fear/greed, averaging down when stocks fall at support prices, averaging down on liquid stocks and you just have to believe.
Then you ask again: "Do we have to have big capital for averaging down Mr. Heze?"
I must admit that the size of the capital is very influential. If you don't believe it, you can read again about the story of Lo Kheng Hong who was averaging down in PTRO shares: Lo Kheng Hong and How to Profit from PTRO Shares - Part II.
In essence, with a larger capital, you have more power to averaging down. What if you don't have big capital?
Yes, you don't have to force it. Over time as your capital increases, you will have a greater ability to averaging down, and must be in the right way too of course.
