Trading Trail #6: Averaging Down

The other day I told you that it can sometimes be okay to average down, providing you can do so at less risk, and that’s exactly what I’ve done today.

The following table shows which equities I have averaged down by adding a second position at a lower price. Since I have retained the original stop order level on the first position, and applied the same stop order level to the second position, the reduced risk-to-stop is illustrated by the final two columns.

Do you see how I consider this ‘scaling in’ to my positions to be better than having gone in all gung-ho with £2-per-point positions in the first place? And better than ‘averaging down’ in the traditional sense, whereby the second position would take on the same risk as the first position?

My strategy is all about money- and risk- management, on the basis that:

‘If we look after the downside, the upside will take care of itself!’

This philosophy also extends to scaling into positions by pyramiding up, which I would only do if I could achieve it at less risk by betting on a second position using profits that had been locked-in with a better-than-break-even stop order on the first position.

From the Stop-Out List

In other news…

I re-established positions in this account which had previously stopped-out at higher prices in another account. My cost savings in these case are too little to mention, but I wanted to take these punts anyway and at least I did so more cheaply. The new entries were:

Home Retail, bought at 91.2, new stop order at 86.

Rentokil, bought at 66.2, new stop order at 61.

Ocado, bought at 87.1, new stop order stop at 81.

There was one other new trade today, in DTZ which had fallen by some 70% this morning because (apparently) the majority shareholder had decided not to proceed with a bid for the company. This stock had also featured on my Stop Out List as a result of stopping out in a previous account, and today I managed to re-purchase at a price of 6.1p compared with a last stop-out price of 19p. In early trading, the price fell further to 3p, so in keeping with the theme of today’s article… I averaged down with a second position at that price.

Oh, and today I managed to raise my stop order on Xchanging to slight-better-than-break-even at 67p. So this position is no longer risky.

Tony Loton is a private trader, and author of the book “Stop Orders” published by Harriman House.

Tags: averaging down