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Hi Russ:
I did post from time to time to the 2 groups - omega and code - about an
averaging down "buy" system (I'm also looking at the possibility of an
averaging down "sell" system eventually, when the multiple-year bull market
is dead and the bears reign).
In fact, several members on the lists help me out a great deal.
The idea works quite well in general. But in addition, there may be other
factors to consider. I'll list them here again, as in the past posts.
They are not all-inclusive.
1. Go with the major market trend.
Right now, I think we're still in the bull market. So I will go long only.
(In fact, 95% of my trades are in calls, especially the long-term <leaps>
type.)
2. Go with good stocks.
These would have to be fundamentally sound.
By that, I refer to blue chip/high tech/drug etc etc stocks like IBM,
CSCO, LU,
DELL, EMC, FON, INTC, MSFT, MRK, JNJ, BGEN, AMGN SUNW, WMT etc etc.
When I say "fundamentally" sound, I mean long-term basis. For example,
DELL has
dropped 34% from its recent high. If one subscribes to the theory that the
fundamentals are already reflected in the current market price, then one
can say
that short-term fundamentals are not so good. BUT, long-term basis, unless
something drastic happens, I don't see that DELL is NOT a fundamentally sound
company.
3. Somewhat adequate timing.
I never assume I have perfect timing.
Since I use an averaging down approach, I would buy on dips (ie, bottomfish):
for example, a 50-day-low for DELL is around $35, and the stock closed around
$37 1/3. I would look for some sign of bottoming out (eg, rsi, momentum,
slowd)
before I plunge in.
4. Go for long-term calls, since we are still in a bull market.
<< Note: many experts have mentioned a major final top may come in the
next few
months. After that, it may be a long-term bear market. So, choose which
side one wants to play, and be psychologically prepared that in the final
outcome,
averaging down buy may lead to disatrous results.>>
5. Good "money management", as I define it.
If I plan to spend, say $10,000, I will divide it into 3 or 4 parts (3 -
$3,500
each; 4 - $2,500 each).
My initial buy of the calls will be that portion ($3,500 or $2,500,
depending).
Subsequent buys at lower prices (=averaging down) will be either of equal
amount
as before or increasingly more dollar value.
For example:
equal amounts (4 parts): $2,500; $2,500; $2,500; $2,500
increasing amounts (4 parts): $1,500; $2,000; $3,000; $3,500 (for example)
(This loosely fits the definition of "martingale system", since I'm
betting on
an increasing number of CONTRACTS.)
6. No "stop-loss" provision.
In general, "money management" should allow for stop-losses. However, by
averaging down, I have to exclude this provision.
7. Allow for multiple profit targets if one wishes.
For example, your average cost is $5.
Sell some at $7.50. Sell more at $12.00. Sell the rest at $20.00.
8. *** Trader discipline ***
Looking back at all my options trades over the years, there is one constant
glaring problem in my trades. I got too greedy. For example, I had 5 times
profit, but I wanted more. In the end, the options expired to zero. THAT
IS VERY BAD TRADER DISCIPLINE, and is beyond technical analysis or good
trading
systems. So far, I still consider myself very immature in this respect.
I don't
know if I can correct this weakness during the rest of my trading life.
Unfortunately, one has to accept one's shortcomings if one can't improve
on them.
9. Be discretionary.
I never BELIEVE 100% in any system. My assumption has always been that
even if
you can purchase a $1 billion trading system, it would still be imperfect.
And
even if it's perfect, it's human nature that makes the trades not perfect.
My
former broker and mentor once observed that if 100 people used the same
system,
there would be a hundred different trading results even if they started
with the
same amount of capital and traded the same <whatever - stocks, futures,
options>
initially.
Very often, I have buy signals and I don't feel like trading. I'll just
let them
pass. Lots of times, I would lose golden opportunities making huge
profits. But
then that's my personality.
10. Since nothing works perfect, be prepared that one's trades can backfire.
Like you, I would like to read more posts on "averaging down buy" or
"martingale system". And like you, I was told by a lot of others that this
is a sure way to disaster. I'm lucky so far.... Who knows, one of these
days... ??? !!! ???
Regards,
Wong
ps: During the last few years, I had to pay increasing income taxes on my
capital gains.
=========================================================================
At 07:08 PM 05/24/99 EDT, TWA7663@xxxxxxx wrote:
>... Like most on this list, I have heard many negative reasons why NOT to
use a
>system that may buy more after a loss. I hope we could benefit by limiting
>the discussion to those that have tested or traded with success by buying
>more after losses. If we get no further discussion, we can assume that none
>has or none knows of anyone that has had success with this method.
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