Most seasoned spread bettors and other traders will tell you that it is usually a bad idea to “average down” by adding more funds to a losing position, despite the obvious temptation to lower your overall purchase cost and therefore to break-even much sooner. I said as much in my Position Trading book. Then I had a re-think, and in the “Tricks of The Trade” chapter of my Better Spread Betting book I talked about “Averaging Down (Safely)”.
The fact is– sometimes it does pay to average down, as the following real-life “Trade of The Week” example demonstrates:
You can see that I bought Trinity Mirror on 15 March 2012 at a price of 37.6p-per-share, and then again on 30 July at a lower price of 27.1p-per-share. Due to the subsequent meteoric rise of the Trinity Mirror share price, both positions are now in profit and both are protected by a profit-securing guaranteed stop order at 51.3p-per-share.
A picture paints a thousand words, and this is what it looks like on a Capital Spreads price chart:
The PROFIT lines shows the profits guaranteed by the stop order on both positions, and of course there is additional “paper profit” that I could take right now if I wanted to. But I don’t.
Two Steps to Better Spread Betting:
Disclaimer: this posting is for general education only; it is not trading advice.