You may be wondering, “Why we need to know about the worst trading strategy around?” There are a couple of reasons. First, to warn you about it. You really don't want to end up using this system. Secondly, because once you know the worst possible strategy, the one that is designed to maximize your losses over the long run, then you can reverse it to craft a strategy which does the exact opposite.
With what you learn from this system, you will be able to create a system that will produce some tremendous long-term gains. The strategy I'm referring to, which is simply the worst system I have ever encountered, is known as averaging down. This is the process of buying more shares of a stock that you had previously acquired, as the price drops.
Traders often purchase shares this way in an effort to reduce their initial entry price.
Only bad investors average down by buying shares of a sinking stock to decrease their overall average price per share. This strategy is hardly ever effective, and is often like throwing good money after bad. It also magnifies a traders losses if the stock keeps dropping. Remember, just because a share is cheap now that doesn't mean it's not going to get any cheaper. However, let's examine how this devastating strategy works. Say you bought one thousand shares at $40.
The novice investor may not have a stop loss in place, and the share price falls to $30 dollars. Here comes the stupidity of this strategy – to average down the novice trader might by another thousand shares at $30 to lower the average cost per share that he'd already purchased. So, his average cost per share would now be $35.
Unfortunately, the share price may fall even further, and the novice trader will again buy more shares to reduce the average cost per share. They end up buying more and more into a stock that's losing their money.
Now, imagine this strategy being applied to a portfolio of stocks. In the end, all the capital will automatically be allocated to the worse performing stocks in the portfolio while the best performing stocks are sold off. The result is, at best, a disastrous underperformance versus the market.
If a trader uses an averaging down system and uses margins, their losses will be magnified even further. The biggest problem with this strategy is that a trader's gains are cut short, and the losers are left to run. My advice is – never average down. The process of buying a stock, watching it fall, and then throwing more money at it in the hopes that you'll either get back to break even or make a bigger killing is one of the most misguided pieces of advice on Wall Street. Never be faced with a situation where you'll ask yourself, “Should I risk even more than I originally intended in a desperate attempt to lower my cost and save my butt?”
Instead, craft a simple, robust system with good money management rules. I can practically guarantee the results will be better than averaging down.
How To Lose Everything - The Worst Trading Strategy Ever That You Might Be Using
