I have found that Averaging up works the best, mainly because you are adding in the direction of the trend. So trend is your friend.
Averaging up did not come naturally to me. I usually bought big chunks at the beginning of my investment in a particular company and used to cut positions as stock prices went up in a bid to reduce my purchase price. But after a while I realised that if my picks had to make a difference to overall portfolio, then I had to be concentrated in my winners and not dilute the positions. (unless allocations went out of sync)
Usually it takes a couple of instances of averaging up and the previous mental blocks are released and this thing starts becoming easy to practice.
Averaging down is a tricky thing. It can work if you know what you are doing and know your company in question in side out. Or else if you are very very good at technicals and pick up stocks you own in declines at crucial turning points, from where stock prices tend to reverse direction.
As you know, I am a firm believer in many of the tenets of technical analysis… So averaging down is often difficult. Sometimes I find that in stocks I own, (and am very convinced about the fundamentals) there are routine corrections of say 10-15% and stock price shows consolidation and some signs of reversal at crucial levels . ( important fibo retracements, or important moving avgs, or breakout levels etc) . In these kind of situations, I often increase my holdings.
In one of my major holdings, fluorochem, the fundamental picture was quite encouraging since past few quarters and management commentary was good and actual delivery was even better. I was quite late to the party, having entered at around 2200-2300 ( I was told about it at around 700 few months back by a friend, but somehow managed to miss it because of focus elsewhere, and stupidity) and saw the stock price starting to move up. I kept averaging up as liquidity was also not very good. On 1st June, stock price started correcting from levels of 3000, ( on 13 june I was stopped out of my position in RBL bank, so I was flush with funds and hurting because of being stopped out) . Now on 20 June stock price reached its 200 dema around 2400 and there were signs of reversal exactly at that level, which also happened to be 61.8% retracement level of previous rally. So I loaded up on that day and there was some strong selling, which allowed easy buying… Stock price rallied strongly post that. Even after recently quarterly results there were a few days of weakness, where stock price was available at around 3250, (above crucial breakout level of 3200) on some days. I had bought then also. Fluorochem is one of those rare instances where the technical and fundamental picture is very clear and I was able to use technicals to good use in a company with strong fundamental momentum.
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