Averaging as suggested by the name means averaging or modulating the original buy price of a stock by buying more quantity of a stock later on and hence modulating the average holding price of the stock , averaging is mostly done by investors but swing traders and positional traders can and do implement this tactic to benefit even more from their winning trades , day traders shouldn’t average due to the restriction of the time frames , also averaging doesn’t benefit day traders and they should avoid it .
Should you employ Averaging of stocks ?
As already discussed above in the article averaging is employed by clever investors and swing traders who want to ride the trend and are confident of their trades , they want to buy or short even more because they are sure the market trend will not halt , averaging can be not only employed in long positions but also in short positions so it works both the ways wonderfully , one should decide to average only when one is completely sure of the momentum because averaging can also become a double edged sword sometimes . Below is a stock average value calculator that you can use , it employs basic math , we would be not going over the math here , feel free to bookmark the page and use the below calculator .
Stocks Averaging Calculator
Enter details below and calculate the average cost of your stock holdings
3 Golden rules for Averaging stocks –
Below we will discuss about the three golden rules that every trader and investor must know before employing averaging in their trading or investing strategies –
1.Only average winners and never average losers –
The top most rule of averaging is that you should never average your losers and only average the trades that you have most confident in , this might be contrary to what other elite traders or trading gurus might tell you but this is the true and the only way that averaging must be employed , if you have winning positions then you can look for opportunities to average and even churn more profits if you are sure about further bullish or bearish moves , but when the trade is going against you and losing money you shouldn’t average those losers because you don’t know when and if the stock will turn into your anticipated direction or not , averaging losers can put you even larger hole of losses .
Above is the technical chart of Yes bank as traded on NSE , India , Yes bank underwent some deep scandals and its price fell from 300 Rs. value and made all time low of 4 Rs. in march 2020 , some traders and investors kept averaging in the hope of a reversal but alas the reversal never came and now they are stuck . So what did we learn here ? Never average losing trades/investments !
2.Average on pullbacks not on the tops –
Another golden rule to averaging is that you should refrain from averaging at the tops of the market trend you are riding that is avoid averaging too high because it will drive your average price much higher and if the stock goes against your anticipation after that then you might loose all the gains or worse even end up in losses , so always wait for pullbacks or consolidation in the trend and then average your stocks if you are sure that the bullish trend is intact .
Above is the technical chart of facebook inc. as traded on Nasdaq, USA if you would have initially bought at price marked by the blue arrow on the left side the price sure went as per your anticipation but you should have refrained from buying at the top marked by the red arrow and should have waited for the pullback to enter the trade in order to get the most benefit out of averaging .
3. Only average Fundamentally good stocks –
The final golden rule of averaging your stocks is that you should only average stocks that have good fundamentals , in the beginning i said that averaging doesn’t work for day traders because they don’t need to look at the fundamentals they only ought to see the price action but investors must have advanced knowledge of fundamentals and must invest in only fundamentally good stocks which have good track records , strong balance sheets and perfect promoters , swing traders and positional traders doesn’t need to know A to Z about fundamentals but they should have a beginner level understanding of fundamental analysis .
Now why should you average only fundamentally good stocks? because they have the least chance of spoiling your trades or investment , averaging the stocks of a fundamentally strong company will improve your win rate , likewise swing traders and positional traders can also use this to improve their chances of win and to ride the trends and accumulate even more profits by averaging their stock trades .
What quantity you should use to average your stock ?
So we have discussed the 3 golden rules of averaging but one question must arise in the minds of traders and investors that is – what quantity should i average my stock with ? Answer to this is very simple you should only average with less than 50 percent original quantity that is if you initially bought 1000 shares you should buy less than 500 shares to keep the balance and to stop from being too near the current market price and save yourself from losses resulting from sudden volatile price movements , if you want to buy more than 50 percent shares it should be fine but you should carefully place trailing stop orders to protect your profits also keep in mind your risk management .