According to Investopedia, averaging down is an investing strategy that involves a stock owner purchasing additional shares of a previously initiated investment after the price has dropped. The result of this second purchase is a decrease in the average price at which the investor purchased the stock.
Using my strategy, I figured that Best Finance Company Limited (BFC) has had a one-month long correction in a long-term upwards trend. Corrections in a bull market are the perfect time to enter. Furthermore, there was a huge spike in volume on BFC’s stock chart the day before I bought the shares. I thus bought a few shares at Rs. 191.
However, the stock began to lose immediately after I bought it, resulting in the formation of what seems like a Double Top pattern. The Double Top pattern is a bearish pattern. Perhaps the upwards push was too immature to last any longer.
However, as I kept watching the stock, I realized that the price was having difficulty breaking down from the support level. This is probably an indication that the support level is strong and the price may not break below it.
Adding to the aforementioned fact was the price movement in BFC. The stock formed a neat pattern that resembles three white soldiers’ candlestick pattern. Although the move isn’t supported by enough volume, it feels like a bullish reversal signal for me. I thus bought additional shares of BFC at Rs. 165.
Adding more to a position, however, increases overall risk exposure and inexperienced investors may not be able to tell the difference between a value and a warning sign when share prices drop.