What's the difference between Dollar Cost Averaging and Averaging Down?

In: Business.Investing Asked by: sherwin Mar 17, 2009 - 91 Months Ago.  Viewed 89182 times

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Trading profit is calculated as the proceeds of the sell, less the cost of the buy. Averaging down refers to buying more after prices have dropped, resulting in lower average cost of your position, but a much larger position, often against the trend.

Scale Trading is very similar to Averaging Down. Scaling is a "so-called" strategy that adds to a losing position; Averaging Down is more ad-hoc, and typically an emotional reaction when losses are starting to hurt.

Ranges happen all the time, creating the illusion of predictable prices. Within the parameters of a trading range, these strategies can be very profitable, buying low and selling high. Traders fall into this "range trap", often making a few successful trades. But when a trend starts, prices move beyond what's "reasonable", eventually shaking these "weak" hands, causing margin calls and account closures. Range Traders buy low and try to sell high, except prices never get high, until they're forced out of the game.

Successful trading requires objective analysis with a clear mind. Holding onto a countertrend position is not the result of a clear mind. Averaging down is what took LTCM, Barings, and the majority of traders out of the market. Good traders may average into a position, being flexible in the position size, but they will never build a position so large that it affects objective decision making, nor hold a losing position beyond their risk parameters.

In contrast, Dollar Cost Averaging refers to regularly adding to an investment. With the same dollar amount invested regularly, more shares will be bought when the prices are low, resulting in better investment performance.

If nothing else, don't scale buy NEW LOWS, nor scale sell NEW HIGHS. Unless you're really sure there's value... and KNOW 100% it won't go to zero. Because if New lows are hit, by definition that's a downtrend.
Answered by: sherwin - 91 Months Ago.
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Commented by: xiaojun - 8 Months Ago.
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Value cost averaging is a strategy for spending more money to buy stock when the price is low and less money when the price is high. It is similar to dollar cost averaging, though it can be more effective and it requires more of an active role for the investor.

The strategy of "averaging down", as the term implies, involves investing additional amounts in a financial instrument or asset if it declines significantly in price after the original investment is made. It's true that this action brings down the average cost of the instrument or asset, but will it lead to great returns or just to a larger share of a losing investment? Read on to find out.
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Answered by: toponsmar - 60 Months Ago.
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