Tired of averaging down and increasing your risk exposure? Well, if you knew how to read an oversold pattern, then you might not have to. Luckily for me, I learned how to do just that with the help of some stock trading lessons. I’m not saying it’s easy but with some application and a decent stock average calculator you can still come out a winner when the market moves against you.
Thanks to their insights, I found out how to pick the right entry points for stocks, as well as when to cut my losses and bail when I found them going into oversold status. That’s not to say that averaging down doesn’t have a time and place in a trader’s strategy. Sometimes, if you’re in a stock for the long run, using an average down calculator can be very helpful for bringing your average price point down and reducing the cost basis of your position.
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The average stock price calculator works like this. The average price is multiplied by the number of times it occurs. The results are added together and then divided by the total number of occurrences.
For example, let’s say you buy 100 shares at $10 each, then you buy another 100 shares at $5. The total number of shares is 100 times 2, which equals 200. In total, you paid 100*$10 and 100*$5. The total cost is $1,500, which is now divided by the total number of shares.
The total cost divided by the total number of shares is $1,500/200, which equals $7.5. You now have a position in the stock for 200 shares at a lower price than your initial trade. For your trade to break even the price of the stock must reach $7.5 instead of $10.
The stock average calculator is used by stock traders when they follow the strategy known by the same name. The average down strategy consists of buying stocks of the same company as the price continues to decline. The calculator adds up all the trades in the stock and gives you the average price.
The idea is that you will end up with an overall position of that stock at a lower price than if you simply held on to the initial trade. As the stock’s price continues to fall and you continue to buy new shares at cheaper prices. And the average price of the shares you own also falls.
The strategy brings an immediate advantage. If your average stock price is lower, it will be easier to start making a profit when the price of the stock starts to rise again. This strategy should be contemplated before initiating your first buy trade.
If your total position is 100 shares and you buy 100 shares in your first trade, you will be overexposed to this stock as the price falls and you buy more shares. For the strategy to be effective you should buy the same amount as the initial trade.
So, if you buy 100 shares you would then need to buy another 100 shares when the price falls. Now you would have twice the exposure in the stock compared to what you had planned to hold originally.
To avoid this situation and have the possibility of averaging down if the stock price falls, you would need to buy a much smaller amount in your first trade. Using a smaller trade volume in your initial buy allows you the room you need to average down.
Still not crystal clear? Check out this explainer from Corporate Financial Institute to learn more about how averaging down works in practice.
The average down strategy is a double-edged sword. The opportunity you have from buying shares at lower prices as the market falls means you should also initiate the first trade with a fraction of your total number of shares.
If your total exposure to a stock is, say, 100 shares, and you are going to implement the average down strategy, you would need to buy 50 shares initially or 33. Reducing your exposure to the stock in your initial trade means that if the price never falls you will have missed out on buying the stocks at a low price.
You would then have to buy the remaining shares at higher prices, reducing the overall profit from the trade. However, this strategy is a defensive one when used with the appropriate risk control. If you are buying into a stock that has already risen sharply you may want to keep some firepower at hand in case the price experiences a correction.
Note that averaging down is one of only several strategies for risk management when actively investing. Savvy investors may want to combine other risk management tools with averaging down in order to safeguard their capital from losses.
The average Stock Price calculator can also be used to determine at what level you would reach an average price you might want to target. When you are considering averaging down you don’t want to take action too early. Too small a difference in price will not change you overall average by much. And it leaves you open to further drops, in that you may find you lost the opportunity to average down at lower prices.
There a few reasons why you may want to average down, and our average stock price calculator can give your average price effortlessly. Let’s go through the main reasons to using this strategy.
This strategy looks at stocks that are undervalued. Therefore, they are trading at a discount. The idea is to add more of this stock at a discounted price as the discount gets deeper.
Extra care is warranted as often stocks appear to be trading at a discount, i.e., low P/E ratio or low Book-to-Market ratio, when in the end it turns out they are not.
This strategy implies adding a specific amount of cash to a stock or portfolio of stocks on a regular basis. The regularity of when more cash it used to buy more shares can be determined by time or by percentage moves.
That’s to say, the strategy could be implemented once a week, or month, or every pre-defined length of time. Or it could be implemented every X percentage move up or down. So, regardless of price, stocks are added to your portfolio according to your metrics.
In some cases, averaging down can help in loss mitigation by increasing the trade size and lowering the average cost price. This is because when you lose 50% in price, to regain that loss price has to rise by much more. An example will better clarify.
Lets say you buy 100 shares at $75.00 and price falls by 33.33 percent to $50.00. Now to regain that loss, the stock price must rise by 50 percent.
Now let’s say at $50.00 you buy another 100 shares to average down. You now have a position of 200 shares at an average of $62.50. With this position you only need the stock price to rise by 25 percent to break even.
The reason I call this tool a “Percent Gain Calculator” is that you should be making gains on your trades. If you aren’t, then, let’s be honest, you probably need a hand with your trading. After all, the market has made countless millionaire traders over the past few years. There’s no reason why you can’t include yourself among them.
However, what the average stock price calculator doesn’t tell you, is when to apply this strategy. That’s were strategy and trading expertise come into play. You have to figure out when and when not to apply an averaging down strategy. Some stocks will simply move higher with no retracing in price. This means looking to average down will cause you to lose out.
So, there is no need to go it all alone. Several companies offer their expertise in stock picking and market timing, to help you in your trading. Take your trading game to the next level. Sign up for the best stock trading tools I’ve had the chance to use.