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Chapter 6 When Not To Average A Trade

Risks of averaging a trade

A trade must only average after thorough analysis and conviction that the original trend in the stock is still intact. Averaging should be done in stocks that have witnessed a correction due to reasons other than any fundamental change in the company and still indicating good strength on the technical charts. Averaging consistently just to reduce the cost of your loss making trades should always be avoided.

Consider the example of Reliance Communications

The stock after hitting an all time high of around 845 levels has been in a constant downtrend. The entire sector has been facing pressure from the past few years due to fresh competition that has come. Moreover, the fundamental factors of the company has constantly deteriorated and is currently facing huge debt, which has led to its interest cost being larger than the market cap of the company. The chances of the stock trending higher are extremely low without any material change in the company. It is better to take a loss and exit your trade rather than pumping in fresh money to average your trade in such stocks.

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