Why Trend Followers Don't "Average Down"...

The above is a weekly chart of Cenovus Energy (CVE.TO). Forget that the CEO announced today that he would be retiring later this year (usually not a good sign of things to come). Look at the price action of the stock. A series of lower highs confirms a very persistent downtrend over the last 5 years.

 

A trend following trader/investor with a long term time frame would've never had a reason to own this stock. No new highs were made and no downtrend lines were ever broken.

 

Buying into a downtrend can be hazardous to your investment health. But what about averaging down? Isn't this what we are told to do when we like a stock that's "on sale"?

 

If you were buying low or averaging down on Cenovus Energy over the last 5 years you would've thought $30 was low, $25 was low, $15 even lower (Wow that's cheap!). How about today at $9 and change? 

 

If you're going to "average down" or "dollar cost average" you better have confidence in the long term prospects of the company you're buying.

 

It also depends on your time frame. If you're a shorter term trader or have a smaller time frame adding to your losing position is probably not a sound strategy. It goes against one of the oldest trading principles of cutting your losses short and letting your winners run.

 

The next time you want to keep buying when your favorite stock is going down, take a moment to remember what time frame you're operating in and how confident you are in the long term survival of the company.

 

This is one of my favorite photos of legendary trader and hedge fund manager Paul Tudor Jones. Clearly he wasn't a fan of adding to a loser...

 


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