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Dollar Cost Averaging

 

 

Dollar cost averaging is one of the highly popular methods investors use. If a stock they own keeps falling, they will buy more of that stock and bring their cost basis down. Similarly, some investors have automatic programs for buying certain stock each month on a particular day. The rationale being, this will smooth out the ups and downs of the market. They utilize a fixed amount of money every month, so if the stock has fallen in price, they buy more quantity. If the stock has risen and is more expensive, they buy less of it.

Well, guess what happened to some of these ‘Dollar cost Averagers’, from the time the Nasdaq index peaked in 2000 and started its downtrend. These investors tried to dollar cost average companies which kept falling almost every month. Not that these were bad companies. Some of the reputable stalwart companies like Cisco systems, Microsoft, Intel, all got hammered by the downdraft. Many of these companies still have a long way to go before they reach their 2000 peak.

But yet, people still keep averaging down. They keep repeating the same mistakes over and over again. The reasons are plentiful:

  • Some don’t have the time to do technical analysis.

  • Some do not understand technical analysis.

  • Some are die hard fans of ‘buy and hold’.

  • Some are eternal optimists.

  • Most do not like the idea of taking a loss and so on.

Averaging down is a losing game. Here are some reasons why:

  • There is no way to know how low the stock is going to go.

  • Even if you decide a target for the stock, you will not sell it if it breaches that level. You will just define another target.

  • Your money is now stuck in that one stock which is taking your portfolio down. This money could have been used in other high probability profit situations.

  • Your emotional strength and confidence is dwindling day by day.

  • Your experience of the stock market is getting negative which will affect your future performance.


At Profitable Candlestick Charting, we believe we need to be in stocks / markets which show strength, whether it be on the bullish side or the bearish side. We always buy strength and sell weakness!