Doing the act of averaging up and averaging down when buying stocks is usually influenced by one's trading psychology. These two actions really reflect the feeling of a trader when averaging up or averaging down. If you don't understand the terms averaging up and averaging down, please read the post: Averaging Down and Averaging Up in Stocks.
Your question: "What does psychological mean?"
I started one by one. I started with averaging down first. As in the post I explained, averaging down means buying shares (again) at a lower price because the stock you own is going down in price.
The advantage of averaging down is that you can get shares at a cheaper average price, so it is easier for you to sell shares. Let's say you buy a stock at a price of 1,000. Then when the stock goes down, you buy again, bringing your average price to 990.
With a cheaper average price, you don't need a price that is too high to take profit, so averaging down can at least minimize the risk of the stock getting stuck at the peak price.
But not all averaging down is a good strategy to implement. Averaging down can also be risky for traders. Well, how come?
Buying stocks by constantly averaging down is sometimes like 'catching a falling knife'. The problem is: you don't know when the price will go back up to its original price.
When you do averaging down, and it turns out the price doesn't go up again, then your ownership increases and you can't sell alias 'hanging'
Also keep in mind, that the trading capital you have is also limited. You may not be able to continue averaging down when the stocks that you hold fall in price. There is a point where your capital will run out if you keep averaging.
As a concrete example, many traders bought BUMI shares at a price of Rp. 8,000 per share when BUMI was still a blue chip in 2008, and when BUMI fell to Rp. 7,800, traders bought their shares again at a price of Rp. 7,700. Etc...
It turns out that the stock continues to fall until today approaching gocap. So here's the risk of averaging down: "Catch a falling knife".
"Pak Heze, does that mean that averaging down is not recommended? Is it really not allowed to do averaging down?" Ask you
Wait, don't make the mistake of assuming that averaging down is bad. In fact, averaging down also has its advantages.
As I wrote in the first few paragraphs, I said that with bad averaging down, you have the opportunity to get a lower average price, but if you often averaging down, this strategy is not right on target.
Averaging down I recommend that you do it only if you have a STRONG BASIS to DO AVERARING DOWN. If you are averaging down when you are panicking, the price is not calm, it means you have set a trap for yourself.
An example of averaging down that is done on a strong basis is like an investor, Lo Kheng Hong who once averaging down in PTRO shares. You can read my reviews here: Lo Kheng Hong and How to Profit from PTRO Shares - Part I and Lo Kheng Hong and How to Profit from PTRO Shares - Part II.
So if your basis for averaging down is very strong, for example, you believe the company's prospects will be better in the future and you want a long-term investment, then you can do it.
Averaging down I recommend more for those of you who already understand a lot and practice trading / investing, so that with more flying hours, you will be better able to manage trading emotions.
In addition, you can read the post about some correct averaging down strategies, to avoid stuck stocks: The Right Stock Averaging Down Strategies.
How about averaging up yourself?
Averaging up is increasing the share of shares when the price goes up, so your average purchase price will automatically be higher. The advantage of averaging up is: you buy a stock when its price goes up.
Stocks that are able to provide profit are those whose prices are bullish. So when you manage to averaging up, it means that the stock you bought is proven to be bullish.
The averaging up technique is also good for medium-term traders or long-term investors, because averaging up shows that your stocks are indeed rising. Investors can increase the share of shares, by waiting for confirmation of the trend of rising stock prices.
But averaging up also has its drawbacks. Averaging up that is done too often, makes your average purchase price high. Automatically you need a higher price also to take profit.
The risk of averaging up, if your average price is high and suddenly the stock price drops, then your previously profitable stock can turn to floating loss. But if you get it at a lower price and not averaging up, it's possible that your stock can still profit when it goes down because it's still above the purchase price.
Therefore, running the averaging up strategy must also be done with the right strategy. You can learn several ways and techniques for averaging up stocks here: Strategies for Averaging Up Stocks and the Right Technique for Averaging Up.
