Never Add to a Losing Trade!

Averaging a loser is never a good idea. If a market is going against you — it is not a time to acquire more at “cheaper prices”.(More).

On the other hand, adding to a position, averaging up, or pyramiding — is smart. This quote from Nancy Gondo, taken from Investor’s Business Daily, titled “Averaging Up In A Good Stock Is Contrarian, But It Works” gives great insight:

Sales often draw big crowds, and understandably so. But don’t seek discounts when it comes to investing. Sure, it may be tempting to add shares of a stock you own if it moves down in price from what you paid for your initial investment. But that can be dangerous, especially if it pulls back on heavy volume. Why risk a bigger fall by buying when a stock gets weaker? Better to average up when a winning stock displays strength. A stock that breaks out of a sound base into new high ground shows support from mutual funds and other big players. Pyramiding, as the process is called, helps lower risk since you invest less money at higher prices.

Continue reading article from Jonathan Hoenig on pyramiding.

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