Averaging UP (buy on support, add on breakout)
What is averaging up? It’s the opposite of averaging down. If you have not read my blog post about averaging down. I suggest you go read it first before proceeding.
Averaging up refers to buying additional shares as the stock price goes up. Sample:
Bumili ka ng 10,000 shares ni ISM sa 2.5 pesos. Umakyat si ISM you added at 2.7 pesos 10,000 shares din. Umakyat ulit si ISM and nag add ka 10,000 shares sa price na 3.8 pesos. Nag add ka ulit 10,000 shares sa 5.5 pesos. Another 10,000 shares sa 6.5 pesos at final 10,000 shares sa 7.5 pesos. You now have 60,000 shares with an average price of 4.75 per share. That’s 285,000 pesos ( di kasama tax at fees). Umangat ulit si ISM at binenta mo ang 60,000 shares mo sa 8.3 pesos which equal to 498,000 pesos. You gained a total of 213,000 pesos. Amazing di ba? Ito pa oh.
Averaging up can be an attractive strategy to take advantage of momentum in a rising market or where an investor believes a stock’s price will rise. 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.
Usually nag aaverage up ang traders sa breakout. May popular pa sila na sinasabe na “buy on support and add on breakout.”
Ginagawa ko ba ang averaging up? NOOOOOO! I will tell you why and I will blow your mind with facts. Ako kasi ayaw ko sa lahat yung pagiging ignorant. Di mo pwede na sabihin na maganda o panget ang isang bagay without showing facts. So here it is. Una sa lahat, the idea na maganda ang averaging up comes from successful breakouts. If bumili ka ng shares sa baba at umangat ang stock (nag break out) then nag add ka shares and the stock continue na umangat then you will have more shares at lower average meaning mas malaki kita mo. Have you ever heard of the term “false breakout?”
Start tayo sa pinakasimple. Kunyare si FNI nasa 1.69 pesos ang resistance level nya meaning kapag umaabot sa 1.69 pesos ang price ni FNI ay hindi na ito umaakyat halos kasi marami nagbebenta sa level na yun. May mga times kung saan dumarami buyers kaya napupush ang price sa 1.7 or higher but after a few hours dahil sa dami ng sellers bumabalik at or below 1.69 pesos pa rin ang price. So nagkakaroon ng false breakout.
70% or more of breakouts are failed breakouts. If you add shares on breakouts at failed breakout pala you will end up with more shares and a higher average. Kapag bumagsak ang price ng stock double loss mo compared sa bumili ka lang once at hindi na nag average up.
One more example na simple is this. Bumili ka stock sa price na 10 pesos. Umakyat sa 12 pesos nag add ka same shares. 11 pesos na average mo instead of previously na 10 pesos. Bumalik ngayon ang stock price sa 11 pesos so breakeven ka lang instead na if 10 pesos average mo gain ka na dapat. Loss ka pa if bumalik sa 10 pesos instead na break even ka lang dapat.
“Eh bakit sabi nila sa amin sa seminar eh buy high sell higher or buy on support add on breakouts?” I will explain to you why. I have been trading for more than a decade. Most ng nagsasabi sa inyo na buy on support at add on breakouts have not traded more than a decade. Ano ang relevance? I will show you.
If you go on specific stocks na umangat ng umangat yung mga nagceiling they will all fall on those “mahabang paakyat” time ng year.
According sa Capital.com:
“Originating from US basketball, the concept of having a hot hand hinges on the belief that the chance of hitting a basket is greater following a hit than a miss. In investing, it means believing you have a greater chance of success after completing a series of successful trades. When applied to stock market investment, a hot hand investor would expect to be rewarded for a new investment decision based principally on the fact that their previous investment was profitable. As a trader, you might feel you are ‘on a roll’, however, studies show the hot hand is a misconception of chance in random sequences. The reality is that there is no positive correlation between successive shots in basketball and the success of your next trade on the markets has no relation to the success of your most recent trades. You do not have a hot hand. Hot Hand thinking can often be linked with what is termed averaging up. Often referred to as ‘pyramiding’ this is when, after buying shares in a company, you buy some more as the price gets higher. The hot hand bias may be persuading you to see only the upside, even though the share price has already risen significantly. Rather than buying low and selling high, by averaging up you are continuing to buy while prices are no longer ‘cheap’. There are disadvantages. For instance, transactions costs are higher due to higher frequency of trading. There will be more commission to pay on, say, four trades than just one. Not only do investors need to set aside cash for follow up share purchases, they will need to buy at a higher purchase price. Another consideration is that the market could turn violently with indiscriminate sell-offs the order of the day. If the share price of a stock plunges, those additional shares bought prior to the price collapse would likely wipe out any profits from previous trades.”
I have presented you with facts now let us discuss an idea. If you don’t believe in averaging down there is no sense in believing in averaging up kasi they are both somewhat the same magkaiba lang direction ng pinupuntahan ng stock. Si averaging down nagrerely sa idea na kahit anong bagsak ng stock ay aangat din yan sa huli. Si averaging up naman nagrerely sa idea na kapag nagbreakout na ang stock ay tuloy tuloy na ito sa pag angat. Panu ngayon kung hindi? Dumami na shares mo tumaas pa average mo.
Now, kalimutan na natin muna lahat ng nasulat sa taas. Let us talk about your experience. Naranasan mo na ba na bumili ka sa mura na price ng konti lang na shares. Umangat ang stock nagsisi ka bakit konti lang nabili mo or maybe wala ka pang BP noon at nung nagka BP ka na umangat na ang stock. Napabili ka then biglang bumagsak. Above pa ng price sa average mo bago ka nag add but dahil nag add ka as it goes up mas mataas na ngayon average mo kesa sa price. Pula na ngayon port mo. There are instances din na gain ka na nag add ka breakeven ka na lang sa huli.
Have you ever stopped and ask yourself bakit ka nag aaverage up? Its your greed!
I don’t average down. If my strategy tells me to exit I will sell. If my strategy tells me mag re entry, I will enter. I don’t average up. If my strategy tells me to sell with a profit I will sell. I will never look at the stock after I sold it. Titingnan ko sya after two or three days. If I bought it at 2 pesos and sell it at 3 pesos, i don’t care if it goes up to 10 pesos. I never regret my early exits if my strategy tells me to exit early. (I have written a blog post about regrets. Read it here). No one can tell kung saan ang exact na top ng stock so I accept that as a fact and go on with my life. Sample ng MAMA strategy.
I buy a stock then sell it when my strategy tells me to. Instead of averaging up I just find another stock using my strategy. I don’t do this kasi unique ako. I do this dahil sa experience. Sa stock trading, experience will mold you. It will tell you a lot more than what books can offer. Most books are written not pertaining sa PSE na market. I was lucky enough na maranasan ang crash noon. Those na nakaranas sa ganun will shake their head if you tell them to average up. If namulat ka naman sa trading kung saan grabe liparan ng mga stocks then averaging up make sense sayo. Medyu panget market natin ngayon kaya mga breakout strategy at mga momentum traders na gumagawa ng noise noon medyu hndi mo maririnig ngayon. Pero baka mag pick up naman ang market this 2020 so momentum strategies at breakout strategies will again be useful. Sa Traders Lounge we have this “show us your result” type of attitude kaya most ng members doon especially those who trade mama posts their trades sa group. You will see it once nag join kayo sa group.
My first trade this 2020.
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2 Comments
mako solano
Thank youu. Learned a lot again!
Trish
Great read! Hot Hand fallacy also mentioned in the movie The Big Short. <3 Thanks for widening my knowledge about averaging up miss Gandakoh. 🙂