Average Up - Adding to a Winning Position

Average Up Overview

Averaging up is rarely discussed in the financial world.  Traders and money managers always speak of averaging down.  How many times have you heard traders say, "The stock is cheap here, buy more!".  I have never quite understood this logic.  If the stock is going lower, which means your initial thought was wrong, why would you buy more?  The majority of traders that make averaging down a part of their trading system end up losing.  The goal in trading is to cut losses quickly, not compound them.  That is why averaging up makes so much sense.  A trader is adding to a winning position as long as it trends higher.

How To Average Up

The first decision a trader must make is where to average up.  The obvious point is when a stock is able to clear a significant swing high or low.  Another method is to add to a winning play when you are up a certain percentage.  Depending on which timeframe you are trading, this could be as small as 1% or as high as 10%. 

Benefits of Averaging Up

Averaging up can work wonders for a trading portfolio when done properly.  The goal in trading is to have small losers and gigantic winners.  When a trader is able to successfully average up, they are using more money per winning trade.  Therefore, the math is in their favor that the winners will naturally be substantially larger than the losers.  Add in the fact that the trader is able to put on more winners than losers, you have a money making system. 

Negatives of Averaging Up

As previously mentioned, identifying the entry is critical to success for adding to a position.  For example, if you buy a stock at $20 and then add to the position when the stock clears $22, if it retraces 50% back to $21, you are now at breakeven.  If you had not added to the position, you would still be up a point, but now that you have "doubled down" you are at breakeven.  This is where averaging up gets tricky.  The one point pullback is minor and not a reason for alarm, but if the trader does not have enough money management experience, winning trades can quickly become losing ones. 

Average Up Charting Example

Average Up

Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

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