Averaging Into Your Winners | Podcast Episode #481

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Hey, everybody. This is Ryan Mallory with shareplanner.com’s

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Swing Trading the Stock Market. In today’s episode, we’re going to talk about averaging into your winners.

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And the thing about averaging into your winners is sometimes they don’t always stay winners. They can turn into losers as well.

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So we’re going to talk a little bit about that in this podcast episode. Today’s episode, though, comes from a person over in London on the other side of the pond.

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And I don’t ever use their real names because I don’t want them to regret, you know, in five, 10-15 years that I use their real name.

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So I always give them a good Florida redneck name. And in this case, Skeeter.

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I like the name Skeeter because it’s a name that I if I had a fourth kid, I’d always want to name him Skeeter.

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If it was a girl, Skeeter, Rita, so, so many folks that it not from the South listening to this, probably the guy that wrote this e-mail.

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He’s like, what in the world did I just write into? But nonetheless, you’re getting a Florida redneck name.

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Skeeter it is. And Skeeter writes, Hey, Ryan, really enjoy the podcast.

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Thank you for your time and wisdom. You talk about letting your winners run, but you ever add to a winning position once you see the

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market is doing what you had hoped it would do, that is increase your position once it begins to trend in your favor.

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Listening here from London, the real one where you don’t have to say anything after it. Thanks, Skeeter.

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OK, lots of good questions there in this particular podcast, all surrounding whether or not you should average into your winners.

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Now, I’d never consider myself to be the ultimate authority on anything in this world. I I just don’t, I’m, I’m a human being prone to being wrong a lot, being fallible quite a bit.

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So for me to say, oh, you should never, ever, ever average into your winners, there’s nowhere averaging into your winners works would be wrong for me to say that because I’m sure there’s plenty

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of people out there that have been successful trading that average into their winners. Now, does it work for me?

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No. And I’m going to give you a lot of those reasons for why it doesn’t work for me.

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One of the things though, I would say where it can work is that if you’re building a position over time, like from a long term investment perspective, you really can’t even avoid it.

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For instance, like when I buy a a stock for the long term, I’m not buying all at once because I’m not trying to time the bottom.

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I’m not trying to determine where the lowest price is going to be before I get in. Instead, I want to average it out over the like 4 to 6 months.

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That’s different than swing trading where your trades are going to be like from a few days to a few weeks.

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When it comes to long term investing, I don’t know where that bottom is. I don’t I don’t know what it’s going to be doing in four to six months.

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So I want to average in my price over the course of many months. And so that’s going to require that I’m buying above where I initially at, bought in at and where

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I’m buying in below where I initially bought in at. So and long term investing, yeah, I think it’s fine, but not so much from a swing trading

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perspective or so at least the way that I’ve experienced it, it’s not always been good. And so for me, swing trading requires that I go all in on the trade, not all in from like I’m

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putting every dime that I have in my account on the trade, whatever my predetermined position size for that trade is going to be.

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And in my case, it’s about 16%. I’m going to make sure that I’m going 16% in.

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I’m not going like 8% now, 8% later, 4% now, 4% down another week later it’s over. I’m not going to just like keep adding to it over time.

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It’s different than the way I get out of a trade. Whereas when I’m when the stock does start going out of going in my favor, I start taking partial

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profits. But when I’m getting into the trade, it’s all at once.

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So the big thing that you want to remember that when it comes to getting into a stock and then you’re adding to it as it goes more in your favor is that you’re actually increasing the risk and

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decreasing the reward. And what do I mean by that is that your average buying price is skewing the reward risk ratio more

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in the favor of risk. If you’re buying it at 100, for instance, OK, you buy stock ABC at 100 and you have a stop loss at

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95 and you think that there is a target area that you want to go after at 110. Well then that’s great.

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That’s 2 to one. But but if you add another, you know equal lot at 102.

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So let’s say you buy a third of your total position size at 100, then you buy another third at 102. Now your average price is at one O one.

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That means you have $6 of of potential risk to the downside and you have $9 of potential reward to the upside.

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Just that $1.00 shift is taking it from a 2 to one return to a three to two potential return. So the reward risk ratio has been greatly impacted there.

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Now if you go to, let’s say I’m going to add another third at one O 4, then your average buying price is at one O 2.

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That means you now have $7.00 of risk and you have $8 of reward. So now you have an 8 to 7 reward risk ratio.

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You’re barely above 1 to one. That is not an ideal place to be and your trade and it makes it really to where it’s not a favorable

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trade setup at all. Now, you could, you know, target like a three to one return, but then you’re requiring and expecting

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more out of the market than what the market might be able to give from a realistic standpoint. And if you’re in a very choppy market, it’s going to be next to impossible because in a choppy

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market, you’re probably going to be getting in just when you should be getting out. You’re, you’re coming into a full position when you should be taking profits.

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So that’s, that’s the problem really with trying to play your trades from a standpoint of adding incrementally to your position.

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Now, sometimes I have found that when people are doing that is that they’re trading with too big a position sizes to begin with.

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They’re they’re trying to say this, I want to trade big, but I don’t want to do it all at once because emotionally they can’t handle it.

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So they’re trying to wait for it to become to a point to where they have a little bit of profits in the bag in terms of like, OK, they bought it 100, they’re at one O 2 now they got 2% in profits.

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I’m going to go ahead and add another third of my position there. But the reason why they’re doing it in the first place is probably because they’re trading too big

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of a position size. If they found their true position size, they’d probably be more comfortable with getting all in at

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at once. And again, I’m not saying go 100% long.

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I’m saying whatever your position size is set out for an individual trade, whether it’s this trade or next trade, it should be really for any and all trades.

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Then if you’re trading within the right position size, it’s probably not going to be as big of a

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problem or a big, big of step of faith to be able to do that.

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So the other question would be then why don’t you just average down then? And because in that, in that way you’re, you’re then working with decreasing your, your average buy

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in price. And that doesn’t sound bad on the surface because, because let’s say you go and by by averaging in

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when you get in at 100 and you, you average in and now you’re buying prices at 99. Well, great.

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Now your risk is only $4.00 to the downside and $11.00 to the upside. You almost made it a three to one return at this point.

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That sounds good. But the problem is, is that your best trades, your best setups to where it does exactly what it’s

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supposed to do. It’s going to leave you in the dust with like 1/3 or 1/2 position.

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You’re not going to be able to get a full position on it. And so that’s going to leave you frustrated as a trader, like, oh, I wish I could have gotten more

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of it because you were trying to average end at a lower price. And then when it doesn’t go lower and it actually does remarkably well for you exactly the way you

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had charted it out, you’re going to be left frustrated ’cause you’re like, I didn’t even get a big position.

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And then the trades that you do get stopped out on are going to be on full positions. So I’m not a fan.

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And I can’t really justify on from a swing trading standpoint, averaging into your winners or averaging into the losers because in both cases it throws off the equation.

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That’s why I’m a person who only puts all of my money in all at the same time. If I, like I said I I trade about 16% position sizes.

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When I get long, I’m getting along that entire amount. I’m not averaging in.

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I’m not, I’m not averaging up. I’m not averaging down and before I get to 1 of the next big issues, I would encourage you to check

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out swingtradingthestockmarket.com. That’s going to take you to my SharePlanner page.

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And there you can see all the different product offerings and services that I that ioffer through this podcast.

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And in doing so, by signing up, you’re going to get all my stock market research. You can even level up and get get my actual trades that I’m taking on a daily basis, my watch list

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It’s a really, really good service. Really good feature.

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There’s a Discord as well on the trading block, so check that out. swingtradingthestockmarket.com.

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Now one of the big issues of averaging into your winners, let’s say, again, let’s forget about the reward risk ratio.

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Let’s say you bought in at 100, and then you get into 102, and then you get into 104. So now your average buying price instead of the original 100, it’s at 102.

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It can lead to some pretty substantial reversals. And that could be even more frustrating because especially in a market like what we’re trading in

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right now, the, the, the potential for reversals everyday looms very large, both to the upside and to the downside.

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No matter what direction you’re trading in, you can get hit with a reversal because there’s so much headline risk in this market with all the tariffs and everything else that’s going on, it is very

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easy for that to take to happen. And so if you’re increasing into it, you are increasing the odds of you losing because you’re

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increasing your basis, your price basis. So if it goes from 100 to 102, it’s more likely that it’s going to close a below 102 than it would

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below 100. And if it has a full on reversal or it takes you out at your original stop loss, then you’re taking

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on a substantially bigger risk or a bigger loss than if you had never averaged in the 1st place and you had just gotten all in at that $100 price mark.

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So you are more prone and more vulnerable by the repercussions of reversal by averaging into your winners.

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Now here’s the other kicker to all of this. When you’re averaging in, your best trades are going to be with reduced rewards because you’re going

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to be averaging up your buying price. So instead of getting in at 100, you’re getting in at 102 and 104 with the average price of 102.

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So your best reward or your best trades are going to have smaller rewards because you averaged higher.

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And then your worst trades are going to have bigger losses because you have a higher basis price, you’re going to have smaller reward.

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Not only that, but you’re also going to have bigger risk. And so when the trades go against you, especially after you have a full position, you’re going to

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have a much bigger loss. So your best trades are going to have smaller reward and your worst trades are going to have bigger

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risk. And that can be emotionally damaging.

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And I stress so much on this podcast how important it is to, to, to manage the emotional capital that you have because there’s nothing worse than getting down on yourself questioning whether or not

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you can do this because you’re putting yourself into positions that are, are there are no win scenarios.

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And so we have to be able to preserve our, our mental makeup and all of our trades. So we have to make sure that even though what we think might result in a winning trade, if it’s not

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scalable, if it’s not sustainable and if it’s not something that can lead to a winning strategy over time, regardless if you how sure you are about this individual trade in the short term, it’s not

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worth it. Managing your mental capital is huge and I’m and I fear averaging into your winners is going to

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again decrease the amount of reward that you could potentially have on your best trades while increasing the the losses on your worst trades.

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So keep writing the show. Send me your questions and I’d love to make an episode out of it.

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Thank you guys, and God bless. Thanks for listening to my podcast, Swing Trading the Stock Market.

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All the best to you and I look forward to trading with you soon.