Why Do I Stagger My Money Into Each Trade?
I always try and average-in my trades in order to achieve the best entry price more consistently. This means I will usually invest 3-4 times in order to get to my “full position” in $NUGT, and I will explain why I do this right below.
The best entry price a trader can achieve is done by taking the opposite side of a short term overreaction, like buying a stock when the market is selling off based on emotion and herding behavior. However, this style of trading has the risk of you “Catching the Falling Knife”, which is when you mistime the bottom and buy into the trade at a sub-optimal price. When this happens, a lot of times our mental ability to withstand losses may get the better of us.
For example, let’s say that $NUGT is currently trading at $19 and has been selling off for 3 days straight, but you believe that it’ll bounce back. You predict the bottom to be $19 based on previous reversal points, and so you input an order for a full position at $19. However a lot of the time the market does not follow technical analysis exactly, and previous support ranges may be broken for a short time before it reverses. So if the market breaks the support and continues to sell off until $18, which is 1/19=5.26% of your full position, that you’re holding as a loss already. As a short term trader with a target profit of 10% per trade, that’s more than half of your target gains. Now most traders would have sold at a loss by now due to the mental stress of holding such a large loss in a short time, and they’ll proceed to kick themselves once the market bounces back and they miss out on their gains.
Splitting up your trades have the benefit of helping you avoid these situations by lowering your dollar losses if you mistime the bottom. If you invested only 25% of a full position at $19, that’s only a (0.0526)*(0.25)=1.3% loss in total. Not only does this help keep you from emotionally selling, but it also gives you the chance to add to your position at prices below your predicted bottom.
Now you’re likely thinking “well what if prices actually did reverse right at $19? Then I would have only participated on 25% of the gains.” While this is true, remember that more likely than not a strong reversal will be followed by a retracement of at least 30-50% of the length of the reversal. For example, if $NUGT reversed at $19 and shot up to $20, you can set your entry point at $19.5 and wait until it get overbought in the short-term and does the retracement.
Remember that stock prices moves in waves, this is especially true for Gold and Gold Miners.