Doc Maher responds to your comments from Throwing Good Money After Bad.
Well I have to admit that I never thought that a discussion on swing trading and averaging down would create so much controversy. ‘Foolish' and ‘contradictory'...well I've been called worse...heck I've been worse. To begin this exciting series, please read Swing Trading with Stocks. The comments below are in response to Throwing Good Money After Bad.
THE PLAY - Buy Long Stock on a Pullback
ALL-STAR COMMENTARY
Let me just say a couple of things that hopefully will clarify my thoughts. Corbin2 is right, what I wrote was written from the perspective of a trader and not an investor as Jim said. When I enter a position I have a plan and that plan includes exits. If I were to buy a stock I would have a stop. I would also stick to that stop. So my definition of a ‘bad' trade in this context is one that stopped out for a loss. I would not remove my stop and buy more hoping that eventually the average cost will make a profit. That would not be part of my plan. I would rather take my money and look for a better opportunity.
Serge is correct that for this discussion I have assumed that you are not trying to accumulate shares over a long period of time. Remember a swing trade is only two to six days. Accumulating shares usually occurs over several weeks or months - a position trade. If that is you plan then adding to your position when the price is low makes a lot of sense. I don't do this so my comments were not addressing this strategy.
If you are familiar with my posts you probably know that I am a big proponent of having a plan. So what I wrote was more of a comment on having a plan and sticking to it than anything else. The problem I often see is that people enter into a trade without considering what they will do if it goes against them. When that happens they often get rattled and rather than take a loss they try to fix it. Sometimes it's a psychological thing, where they don't want to admit that they were wrong. Sometimes it's just a matter of not wanting to take a loss. Whatever the reason, these are not good reasons to stay in a failing swing trade or buy more.
People often explain to me that they can't sell that stock because they don't want to take a loss. They feel that as long as they don't close the position that they haven't really lost anything yet. It's just a "paper loss". Someone once told me that there is no such thing as a "paper loss". If the position has lost money, it's a real loss even if you don't close it. Why? Because what you have isn't worth as much as what you paid. So you can't close it and convert it to as much cash as you had. That's a loss. That doesn't mean it won't recover, but at this point it's a loss.
If you get stopped out and later you see another opportunity you like in the same stock go ahead and buy it. I don't hold a grudge against a stock because I got stopped out. I'm just not going to hold it on the way down. I would rather get out and get back in.
Finally, this wasn't intended to be a discussion on fundamentals or long term versus short term, etc. If your plan is to buy "quality" as an investor and hold it for the long run, then that is your plan.
Happy trading.
"Income Trader"
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For a list of previous All-Star Trades, please click here.
Doc's previous posts: Throwing Good Money After Bad and Stay out of Trouble
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Community, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Jonathan F. Maher, PhD has a professional business relationship with TradeKing.
