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Chapter 7 Who should Consider to Average

Averaging based on trading style

Averaging, as a strategy, is not meant for every type of trader in the market. Since averaging is a time based strategy, it would not match the trading profiles of certain type of traders.

Trading style

  • Buy and hold Investor: Person who buys with a long term view on the stock and is not concerned with short term volatility in the stock.
    As long as the fundamentals of the stock are still intact and nothing materially negative has impacted the stock, the investor can consider averaging the stocks in a bull market.

  • Positional Trader: Person who buys stocks with a time horizon of few months to a year and tries to capture the major trend in the market.
    Average if you are confident about the fundamentals of the stock and any correction that has occurred is expected to recover. Problems if any related to company or sectors are short term in nature.

  • Swing trader: Time frame is generally short term, few weeks to months. Swing trader tries to capture the short term reversals in the market.
    Multiple averaging should be avoided, in case of swing trading. If the trade even after averaging once goes against you, it’s better to cut your losses and exit the position. Swing traders generally maintain strict stop loss.

  • Intraday trader: Maintains a position only till end of trading session. Does not carry forward any trades.
    It is best for intraday traders to avoid averaging a loss making position, as the time frame is too less to expect a recovery in the stock. Averaging a loss making intraday position usually makes the situation worse.

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