Average Up or Place a Second Trade

To average up is to add more to a winning position. This can be a very effective strategy, especially if you find a stock that is in a nice trend and makes a move of several hundreds of percentage points.

To average up you simply keep your position and buy more as the stock goes up further. The best way to do this is to buy a little more each time a stock makes a higher low. This lets you get into the trade at the lowest parts in the uptrend, and increase your potential profit.

If a trend last for months or years this strategy can be incredibly profitable.

On the other hand putting too much of your money in 1 position does have its disadvantages.

1. Gaps

Even thou large gaps are rare they still occur. If you have too much of your account in one stock you risk it gapping down well below your stop loss and affecting your account in a very big way.

2. Not Diversified

If the trade goes wrong, then your account will be greatly affected. Where as if it was just one of 10 trades it would not hurt your account as much.

3. You risk losing Profits

Say you buy 100 shares of stock at $20 and it goes up to $30. You have made a 50% gain. If you put a stop at around $25 then you would be protecting half of your gain and still can make more. But if you buy another $100 shares of the same stock and have the stop at $25 you are risking breaking even and losing your 50% profit.

Because of this it is normally better to just look for a second trade. Chances are if one stock is in a great trend others will be too.

That isn’t saying that it is bad to average up. It can be useful especially if you use a “dip your toe in” strategy. Where you find a stock that you believe will start to make an uptrend, you want to put $3,000 into this trade the only problem is: The stock hasn’t started going up yet.

You might want to dip your toe in and only put $500 into it with the hopes of investing the other $2500 if it starts to head up. This way you are losing less money initially if you are wrong, and averaging up only if you are right.

Return From Average Up or Place a Second Trade to Momentum Investing