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I'm a beginner retail trader, and I'm trying to come up with a strategy to follow. I know that there is no silver bullet, and I'm ok to exit a trade losing money. I'll only invest in good companies with good management. I'm fine staying in trades for 2 to 8 weeks. With that said, here is the strategy:

Let's say I have 100k dollars to invest in stocks.

At a given moment a stock is 10% below what I think it should be (Of course I know it's very likely that I'm wrong). I buy 5k of this stock. The price keeps falling in the next days, so I buy 5k more averaging the price down. The price keeps falling down and I buy 10k more averaging it down one last time.

I would get to this point only if the circumstances didn't change, and I still think the prices should go up. This is the last step of my strategy, where I had 20% of my stock money in one single stock. If the price kept going down, I would finally exit the trade.

So my question is: What are the problems with this strategy? Did I miss something? Could this be considered a good strategy?

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If you are continuing to rely on the original analysis, this is an example of the Sunk Cost Fallacy.

After the stock continues to drop, you need to repeat your research and analysis, and find out if you still think it is under-valued. If you find that new information shows little upside opportunity, you'd be crazy to quadruple your investment just to "follow a strategy".

  • Good point. If the stock goes 10% down, there should be a good reason (unless the while market goes down in sync). – Aganju Apr 13 at 17:33
  • "After the stock continues to drop, you need to repeat your research and analysis, and find out if you still think it is under-valued". If it was that easy, people wouldn't be in this position in the first place :->) – Bob Baerker Apr 13 at 17:44
  • It makes sense. Thank you for your input. – BrenoQ Apr 15 at 8:23
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I think that you are describing is investing, not trading.

The problems with this strategy are:

  • picking a bad stock

  • lack of risk management (trader)

  • lack of diversification

  • market risk (stock is OK but market corrects or enters a bear)

Could this be considered a good strategy? Yes, if you identify a good value and even though acquiring early, it eventually appreciates nicely. If it doesn't, not so much.

  • Thank you for listing the problems, that was very helpful. You are saying that I'm not not trading because I would buy only from good companies? Or because of the 2 to 8 weeks period? – BrenoQ Apr 15 at 8:27
  • A day trader is "clean and green" by 4 PM EST each day. A swing trader's holding period might be two days to a week. By those standards, 2-8 weeks is investing. – Bob Baerker Apr 15 at 11:25
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Averaging down with increasing amounts is reminiscent of the martingale strategy. It can indeed increase the probability of (small) gains, but at the cost of potential large losses. It is also reminiscent of option selling.

  • You are right, it really sounds like the martingale strategy. Thanks for your input. – BrenoQ Apr 15 at 8:24

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