Dollar Averaging - Good or Bad?

[tech/a]

BSD.
I do understand and accept your point. (being your very own).

However 99.999% of people who average down do so in a feable attempt to mitigate risk.

 

[heredownunder]

Isn't Dollar Averaging is similar to betting 'double or nothing'?
Everytime you lose, you 'double up', so in the end you are suppose to win?

The only time this doesn't work is when the share price keeps going down and you lose, and you lose, and you lose, until you have nothing left!

Take the case of 28-year-old trader Nicholas Leeson who lost £827 million (US$1.4 billion). The Barings Bank trader made an ever-mounting and ill-fated gamble on Japanese stock prices and interest rates. It just kept going down!

Know the company and the environment. Just because a stock goes down doesn't mean its cheap. Its going down for a reason. Find out why.

Perhaps look to buy stocks that are always going up. Like Fortescue Metals. Or, wait for them to have a pull back.

For instance, Woodside Petroleum had been consolidating for over a year. I had been tracking it for ages. My theory was that energy was going to get a lot more expensive. Then it went up from about March 2007, in a big way. Up 35%! Natural Gas was going up in price. I missed the up swing and was kicking myself for missing out. Then there was the big dip in August 2007. I put all the money I had waiting for this and bought the stock. Within 12 months this stock will have doubled.

Look, wait, learn. Then buy.

 

[ithatheekret]

No one has explained how you money manage Averaging down yet??

Please someone???

Anyone

:run:

I sure can't .

From where I see it , Dollar-cost averaging fails to overcome major declines .

It's difficult to make profits when you buy on the downside using any plan , and any systematic long-term dollar-cost averaging has wallys buying on the downside of a plummeting share price ......... and if they stick to the theory half of them wouldn't even know because you don't need a chart for the method , it's a periodical investment option . One that might periodically work in say a mega bull market like we had in the 80's , even then it's a flawed project . If a shares headed south there has to be a valid reason why and they obviously don't know what it is if they're buying into a falling share price . It's always a long climb up the ladder , going down is usually three times as fast , one you beaut way to lose money IMHO .

 

[MichaelD]

There are trend followers who buy dips - retracements in an overall uptrend. I'm not one of them, but this seems to be not unreasonable, and could be (mis)described as dollar cost averaging.

Dollar cost averaging falls down when you are buying something all the way down to zero, when the trend is against you.

As always, it's actually the money and risk management that protects you - admitting at some point that you are wrong and keeping your loss manageable.

 

[tech/a]

Micheal.

This is where I see so many employing this "Idea" go wrong.
They never admit their valuation is wrong.
Infact a fall only serves as a confirmation that the market is wrong and their valuation is right---hence buy some more at even MORE discounted pricing (V their own valuation).

Eventually the fundamentals reflect the market valuation and then most STILL wont agree.

Anyway we are all convinced of our own methodologies.

 

[rub92me]

“It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let that thought be written indelibly upon your mind.” – Jesse Livermore

And another one from good old Jesse: "Of all speculative blunders there are few greater than trying to average a losing game". But hey, what did he know .

 

[clayton4115]

you all talk about buying individual stocks when you talk about dollar cost averaging,

what about dollar cost averaging the index? i am currently buying the index (stw) on its way down, there is no way the index will become zero, the long term trend is up in any stock market, so i keep buying when it keeps going down, i still have another $100,000 to be put into STW, just being patient as i am putting in in drips and drabs as the market wont be going anywhere in the next 12 months.

 

[barney]

Anyway we are all convinced of our own methodologies.

Tech, I think this is a valid point, and one which only a seasoned/well worn trader can appreciate .............. (I consider you seasoned, and myself "well worn"!!! LOL)

Regarding DCA techniques .......... Personally, I have my own slant on this concept, .......... and I tend to "use" it on a smaller time scale, and only on a 2 tier (maximum 3 tier) scale .............. Perhaps my understanding of DCA is also not the accepted norm??

This afternoon I DCA'd an index trade on the XAO ............. I entered with one contract, and averaged down on the second contract at minus 20 pips ............ risky ... yes, but my % of capital was still well in hand, and I saw that my initial entry had not been invalidated even though the slippage had put me in the red .............. I exited the trade for +10 pips .... Lucky ... maybe .... but that is mathematics .... sometimes its friendly ... other times ...

My question is, ........ do the more seasoned traders on ASF "never" top up or "average down" on a trade, if they see an anomoly in the price action (I'm talking shorter time frames here obviously) ?? ............. because, from my limited understanding of the market, it is almost impossible to pick either a short term or medium term bottom/entry for either a stock or an index!! .............

Entering a trade with a smaller initial amount and either "averaging down" to a given point (important that the "given point" be noted prior to the trade!!), or pyramiding up when the trade is in profit seems a more sensible plan to me ............. Anyone understand what I'm babbling on about here??

PS Just read your post Clayton ............. perhaps I'm not alone LOL

 

[tech/a]

Tech, I think this is a valid point, and one which only a seasoned/well worn trader can appreciate .............. (I consider you seasoned, and myself "well worn"!!! LOL)

I'm both--in what capacity---is the question.

Regarding DCA techniques .......... Personally, I have my own slant on this concept, .......... and I tend to "use" it on a smaller time scale, and only on a 2 tier (maximum 3 tier) scale .............. Perhaps my understanding of DCA is also not the accepted norm??

This afternoon I DCA'd an index trade on the XAO ............. I entered with one contract, and averaged down on the second contract at minus 20 pips ............ risky ... yes, but my % of capital was still well in hand, and I saw that my initial entry had not been invalidated even though the slippage had put me in the red .............. I exited the trade for +10 pips .... Lucky ... maybe .... but that is mathematics .... sometimes its friendly ... other times ...

My question is, ........ do the more seasoned traders on ASF "never" top up or "average down" on a trade, if they see an anomoly in the price action (I'm talking shorter time frames here obviously) ?? ............. because, from my limited understanding of the market, it is almost impossible to pick either a short term or medium term bottom/entry for either a stock or an index!!

.............


Ive done it once. Had a position with my son who liked BLG as he works in the field. dropped from the day he bought in (With my $$s) The pain got to great as did the guilt so he wanted to wipe the slate. When I found a bottom on VSA and a targe that looked achieveable I bought in and sold out,got the $$s back.Thats my sole experience

Entering a trade with a smaller initial amount and either "averaging down" to a given point (important that the "given point" be noted prior to the trade!!), or pyramiding up when the trade is in profit seems a more sensible plan to me ............. Anyone understand what I'm babbling on about here??

PS Just read your post Clayton ............. perhaps I'm not alone LOL

Pyramid up I do all the time.

 

[So_Cynical]

SURE

Let us in on the next 10 your involved in using the same strategy.
In REALTIME.
You'll be glad to know that it will become SELF explanatory.


Sorry if I seem Cynical!

Ok REALTIME challenge accepted.

28-02-2008 SUN (160 @ 14.45)
01-07-2008 SUN (165 @ 12.45)

Ill post when i sell.

 

[niknah]

Here's a cool dollar cost average simulator for the S&P 500...

http://www.moneychimp.com/features/dollar_cost.htm

sometimes it works better than buying it all in a lump, sometimes it doesn't.

 

[roland]

Here's a cool dollar cost average simulator for the S&P 500...

http://www.moneychimp.com/features/dollar_cost.htm

sometimes it works better than buying it all in a lump, sometimes it doesn't.

Interesting results, but only valid for mechanical dollar averaging, most would be choosing dips which would change the outcome dramatically

 

[tech/a]

Ok REALTIME challenge accepted.

28-02-2008 SUN (160 @ 14.45)
01-07-2008 SUN (165 @ 12.45)

Ill post when i sell.

Excellent So Cynical.
Just let me know your next 9

Total $4,366.
Date 2/07/08

So based on this position size "potentially" you could need $50,000 to run 10 trades.
Will be interested in return % lets say V T/T results over the same period in terms of % only.

T/T current balance as of friday last $457,263
Here if anyone has no idea what I'm talking about.

http://www.thechartist.com.au/forum/ubbthreads.php?ubb=showflat&Number=64178&page=1&fpart=22

I'm sure people will need deep pockets and I suspect return will indeed be interesting over whatever period you wish to run this.Months/Years are fine.

Thanks for the input.

 

[MRC & Co]

Was just reading the Linda Bradford Raschke interview in "The New Market Wizards" and thought it interesting to see here is one professional who DOES pyramid in as a position moves against her.

She picks market direction.

She has a high win %.

Goes to show, you can use just about anything in the trading world, as long as it fits your personality and you make it your own niche.

 

[So_Cynical]

Excellent So Cynical.
Just let me know your next 9

Total $4,366.
Date 2/07/08

So based on this position size "potentially" you could need $50,000 to run 10 trades.
Will be interested in return % lets say V T/T results over the same period in terms of % only.

T/T current balance as of friday last $457,263
Here if anyone has no idea what I'm talking about.

http://www.thechartist.com.au/forum/ubbthreads.php?ubb=showflat&Number=64178&page=1&fpart=22

I'm sure people will need deep pockets and I suspect return will indeed be interesting over whatever period you wish to run this.Months/Years are fine.

Thanks for the input.

Yes, well, Ive come to realize that what i do isn't strict dollar averaging...more a little
averaging down with no regular commitment...and no more than 2 bites of the cherry.

Ive also come to realize that stop loss orders are a great way to prevent getting into
a position were u have think about averaging down.

 

[tech/a]

EXCELLENT again.

So its been a worth while exercise.
Something positive has been found.

 

[julius]

Was just reading the Linda Bradford Raschke interview in "The New Market Wizards" and thought it interesting to see here is one professional who DOES pyramid in as a position moves against her.

She picks market direction.

She has a high win %.

Goes to show, you can use just about anything in the trading world, as long as it fits your personality and you make it your own niche.

So does Frank Dilernia, and he kills the market.

 

[tech/a]

She picks market direction.

Frank doesnt actually.
He calculates levels where rotation and price may move.

 

[Frank D]

Tech,

Actually I do pyramid in markets depending on whether its a bear market or bull market.

If it's a bear market, I split entry levels and positions sizes.

For example I trade BHP in 4 lot positions, and each bank in 2 lot positions.

I also use partial exit strategies on the way up also.


I take a position at monthly level looking for a reversal pattern back into the 50% level and exit, if the position moves against me, and look for the next level based on a higher timeframe and re-enter the level look for a rotation, which just means I wait a little longer.

The higher the timeframe level the larger position.

If I think the market has it a low, then i'm all in.

BTW, please don't tell others what I do or don't do. There is a good reason why Julius says I do.

cheers,
Frank

 

[redsmartie]

However 99.999% of people who average down do so in a feable attempt to mitigate risk.

Have a goal, I believe in having a target goal, if a person was to decide on a certain target of accumulation then a risk strategy would be commendable. For example you buy no more than 2,000 BHP between now and $50 or if it falls below $35, than make the target 2,500. Then it's about on target or off target and averaging down becomes less painful.