Don’t Get Fooled by This Popular Strategy
Don’t Get Fooled by This Popular Strategy by Jeff Clark – Casey Research
Editor’s note: Today’s essay comes from our friend and colleague Jeff Clark, one of the best traders we know. Over the last decade, he’s delivered 28 triple-digit winners and 78 double-digit windfalls for his readers.
Below, Jeff discusses one of the costliest mistakes he’s come across in his 35 years of trading. As you’ll see, this is a popular strategy that you should almost always avoid. If you don’t know what you’re doing, it can wipe out your entire portfolio…
It took Martin just a few months to blow up his entire account.
In mid-2001, Martin bought 1,000 shares of Polaroid Corporation at $10 apiece.
The company had fallen on tough times. The stock had already plunged more than 50% on the year. But Martin was convinced it would turn around.
“Blue-chip stocks don’t just all of a sudden go out of business,” he said.
The stock dropped to $8. And Martin bought 1,000 more shares.
“It’s a steal at this price,” he said.
Polaroid then fell to $5 per share.
“I’m not worried about it,” Martin claimed. “I’ve done the math. All I need to do is buy 2,000 shares here at $5. Then when it pops back up to $7, I can sell everything and break even.”
You can probably guess what happened… The stock didn’t pop up to $7. Instead, it fell to $2. And that’s when Martin got aggressive. He bought 20,000 more shares.
“My average price is now less than $3 per share. I’ll make a killing when this thing bounces.”
The problem was… Polaroid never bounced. A few days later, it traded for $1.
Martin was desperate. He had “averaged down” on a bad trade. This one stock now made up most of his account. And it was sinking… fast.
Martin started scribbling out another order ticket. Most of the traders around Martin thought he would finally bail out of the trade. He’d sell Polaroid for whatever he could get, lick his wounds, and then move on to getting his account back up.