This guy knows what he is talking about and its similar to how I trade: click here
If you trade big caps and average down properly you can reduce the risk of loss to a minimum. Averaging down works well in bull markets and bear markets but be careful in volatile markets. Its all about becoming skilled at picking the near bottom on the right stocks before it happens, then averaging down and taking profit on any substantial bounce.
That sounds simple enough, but where everybody gets this wrong is in the parameters and the stocks they choose. The correct parameters are: make the first trade small and have deep pockets. In other words, keep most of your powder dry and have enough bullets to last it out.
Here is an example with BHP. Suppose you have a CFD account with $100k in it and access to another $100k if you need it. $100k in a CFD account gives you leverage to hold about $1m worth of BHP at the current price.
When you become convinced that BHP is about to bounce DO NOT throw what you got at it. Buy about 500 shares. Everyone always picks the bottom wrong 9 times out of 10, but it don't matter. If it bounces say 3.5% - then great you just made $500 overnight! Take it!
If it continues to fall then buy more. How much more and when? Get the chart and the calculator out. Ask yourself what if I double up with every $2 fall?
Suppose your first order was at $32 after a 3.5% drop. Then...
$32 x 500 = 16,000 (ave = $32) $30 x 1000 = 30,000 (ave = $30.66) $28 x 3000 = 56,000 (ave = $28.88) $26 x 9000 = 104,000 (ave = $26.96)
At this point, it has dropped over 25% and you are now holding $364K of BHP @ $26.96 ave. You have sufficient funds in your CFD account to go down one more increment, perhaps, and enough backup funds to ride out a crash all the way to $16 if necessary without getting a margin call. In other words, you can't lose because it is BHP.
Finally it bounces two bucks to $28, so take profit! That's $1.04 gain per share or $14,040 (less $700 brokerage) in just 5 days! ... and you are ready to enter and average down again! Again, wait for a significant drop and make the first trade very light. etc
Tips: Be patient. Get used to seeing a substantial loss before seeing a substantial gain. But do not look at your loss and wait for a profit. Respond entirely to bounce and drop. Avoid risky stocks. Only trade secure liquid tradeable stocks with regular ups and downs. Always test your parameters with historic data on paper. When you back stocks like BHP, be prepared to ride it all the way to the lowest of lows (can't loose if you don't get margined out). Use more than the chart for predictions. Look at: os markets, dow futures, indexes, forex, vix, metals, BHP-US, BHP-UK. news, forums, etc etc... See the forest rather than the trees. Its more about predicting tomorrow's market, not just a specific stock, and having confidence.
