Don't Know What to Call This

     I thought about titling this post 'Never Do This!', but then didn't agree- since I did it and it worked (I've made it work in the past, but have also gotten burnt by it). What am I talking about, you ask? Averaging down. Basically, I'm referring to adding to a position that either A. You're uncomfortable with, or B. Isn't acting how you originally thought it would. You can either average down in equal quantities (ie. short 10 shares at $45, another 10 at $35, etc.), or try to really bring your average share price down by adding even more to a losing position (ie. short 10 shares at $45, 20 at $35, etc.) The latter illustration can get you in trouble faster than you can say, "Margin Call".

     To better illustrate my point, I'll use a real life situation you may be aware of: My recent position(s) in FAZ. After it fell from it's grace around $115, and raced toward support around $40, I felt the urge to buy 15 shares (when it was $45). No biggie- "It'll be 60 in a day or so". Well it broke support of $40, so I decided to average down and buy 10 more shares at $35. "Surely it's going back up to $40 where I can almost break even". Nope- yesterday it just kept on tanking, kicking my sorry 25 shares all the way to $26. I watched the futures like a hawk last night and again when I woke up at 5am this morning for work- they showed the DOW being down about 40 pts. I was a bit relieved, knowing that FAZ should begin the day up (being the short-minded etf it is). Well, when I texted my Mom around 9:30 am, she told me it was 24.48. I wanted in! Again. I decided to buy 50 shares under $25. My order was filled at $24.28.

I don't condone this sort of trading (averaging down) for three reasons:

1. It ties up your capital, making it difficult to trade when a better setup presents itself.
   
2. You're bucking the trend, hoping your contrarian idea is perfectly timed.
   
3. These trades can potentially wipe out gains made in many smaller profitable ones.

With that being said, here's three reasons why I decided to average down with FAZ:

1. The rally we've had in financials can't go up forever.
2. Tomorrow is options expiration day (many will be taking profits).
3. FAZ is extremely volatile, and $29 wouldn't be that difficult when combining #1 and #2.

     I picked $29 because it would make all my recent trades with FAZ profitable (even with commissions). When it couldn't quite hit $29 a couple times, I decided (with some sound advice from my brother-in-law) to lower the target to $28.75. Got it before noon. I'd post a chart, but you obviously don't need one if you've read this far.

     In other news, I covered 100 shares of my PALM short AH when it fell to $7.30 after a dismal earnings report. I'm hoping to cover the remaining 150 shares in the very near future. That will put the account pretty much in cash- right where I want to be for the next perfect setup. Let me say it again so I can remember... Perfect setup.

Evan