Defensive Money Management Explained: Second Component Of Averaging Down
Before we start it is important that you do not skip the basic concepts of money management and just read this part in the series out of context. You will learn the technique but it will not serve you well unless you know why you should not employ the strategy casually. Read Defensive Money Management Explained from the beginning will give you a solid foundation in understanding the more advanced topics presented later in the series.
Average Down The Wrong Way
Many people noticed that if they got caught in a very bad situation they can double down or even triple down on the losing position so that the average cost of the position is closer to the current price level of the market. When the market snap back from the directional move, they stand to bail out of the position, either at a small loss or win. That’s all good as long as the market stopped moving in the same direction after the triple down. If it does not stop, the traders who average their losers will lose so much money they face the risk of being wiped out by the market.
It is important to know how to average down correctly which means you know:
1. What you are getting yourself into
2. What is necessary to make it work
3. When to give up when it fails
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