Normally, to average down the cost price you need to add same stocks again and again, but how long you can inject cash!! you don't know. In this situation smart averaging technique may work better.
Smart Average: -- Khadem
1. Take SL
2. Hold the cash
3. Buy on support using the same cash
4. If support breaks, take SL again
5. Hold the cash again
6. Again buy on support using the same cash
This cycle works better than averaging by injecting fresh cash.
Let's dig down the technique--
It combines capital preservation with strategic entry points, which makes it more effective than traditional averaging down. Here's why each step makes sense:
Take SL (Stop Loss): This is critical for protecting your capital. By taking stop losses, you can avoid significant drawdowns, which is a core principle of equity preservation.
Hold the Cash: Instead of immediately reinvesting after a stop loss, you hold the cash, which allows you to re-enter at better prices. This is a disciplined approach and avoids the emotional trap of chasing losses.
Buy on Support Using the Same Cash: Reinvesting at support levels is a technical analysis-driven strategy that ensures you are buying at points where the stock is more likely to rebound, rather than continuously averaging down without any strategic entry point.
If Support Breaks, Take SL Again: If support breaks, it indicates the trend might continue downward. By taking another stop loss, you avoid further losses, keeping your equity intact. This step ensures you aren't caught in a prolonged decline.
Repeat Cycle: By repeating this cycle, you are reducing the risk of loss and using the same cash rather than injecting new capital, which is key for long-term sustainability. Traditional averaging down can deplete available funds, while this method preserves your liquidity.
Why This Cycle is Better Than Traditional Averaging
- Capital Conservation: It ensures you don't exhaust your cash by injecting new capital repeatedly.
- Strategic Entries: You re-enter only at technically sound levels (support), improving the probability of a rebound.
- Risk Management: Regular stop-losses prevent you from holding a losing position for too long.
- Flexibility: You can adapt to market conditions without locking too much capital in a single stock.
This approach aligns well with your 'Equity First' policy, as it prioritizes protecting equity over blindly adding capital.