#TradeSmart Rule No. 2
“Never average losing Trades”.
How many times have your position gone against you?
You planned and executed your trade correctly, yet soon after you bought price goes for a toss. You have three ways ahead
- Hold on with your position and wait for the prices to regain
- Cut your position in loss
- Average or buy some more as it is cheaper than before
One can also hold on to his position but its advisable to cut position in time before a significant amount of capital is vanished.
But in most of the cases people tend to opt for the last option. They average out their position to reduce the buying cost in hope that prices will soon take a U turn. This approach can work at times, but is very risky.
Let us take an example:
Buy one lot of Nifty @ Rs 5895
and average with same qty twice
@ Rs 5800
@ Rs 5750
so the average price = Rs 5815
Suppose we square up @ Rs 5500
Loss without averaging = (5500-5895) x 50= Rs -19750
Loss with averaging= (5500-5815) x 150= Rs-47250
Moreover how rational it is to repeat a mistake once already committed? Then why we do the same with our investments?
Also Read : #TradeSmart Rule No.1
Let your profits compound, not losses!
Be Smart, Trade Smart !