The double down trading strategy will help stock traders to recover from bad trades. You can become a profitable trader if you learn new tactics to deal with losses. Throughout this trading guide, we’re going to teach you what does double down means long with 3 powerful trading tips to double down and buys stocks today.
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If you were new to the stock market and you’re seeing your stocks dip lower and lower, what should you do?
What should be your trading strategy in this negative environment?
Should you stay in the market or should you bail out on your stock trade?
Stock traders who have endured a losing position have been limited to two stock trading strategies:
- Sell and take the loss
- Hold and hope
However, there is a third strategy that can help you recover your stock losses, namely the double down trading strategy. Moving forward, we’re going to explore the double down stock market concepts used by the pros.
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What Does Double Down Mean?
Double down trading is constructed around an existing losing position and it’s built by doubling your position when the stock price falls. Basically, doubling down means that you’re buying as the market goes against you in order to improve your average order entry price.
For example, if you bought 100 shares of Tesla stock and then the price of Tesla shares dropped, you would double down by buying another 100 Tesla shares.
The double down stock market strategy may look similar to the martingale trading strategy. However, the martingale strategy involves doubling the trade size after each loss. Martingale trading increases your risk substantially more compared to the double down stock strategy.
By doubling down you are reducing your stock entry price or lowering your stock entry price. As James Joseph helps explain, this can reduce the risk of a given position being unprofitable.
You need to deploy as much capital as you can so that when the market dips it will allow you to buy stocks at cheap prices. It will allow you to position at lower prices and make money trading stocks.
Investing in the stock market is not just a matter of trading principles, but also about what works in the stock market. Good companies will always go up so throwing good money after bad money is what makes the double down stock market work.
How Double Down Trading Works?
Let’s assume we’re buying 100 Amazon shares at $1,800 and the market continues to go against us by $100. At $1,700 we buy another 100 Amazon shares and doubled down on our stock position.
Now, what happened to our stock position?
Two things happened:
- We doubled our risk from 100 shares to 200 shares
But, we’ve also lowered our breakeven entry price from $1,800 to $1,750
This means that we brought our average entry price down, but at the same time, we have also doubled our risk. Obviously, doubling down means that our timing on the first entry was wrong.
But, we double down because we hope that the stock will perform well in the future. And, that’s where the key is if you want the double down stock market to work.
So, it all comes down to good stock selection.
In the short-term, the natural ebb and flow of the stock price are to move up and down. If you have deep enough pockets the double down trading strategy can keep you in the game for a very long time but, with one condition.
When NOT to Double Down on a Position?
The main argument against doubling down on stocks is that markets never move in one direction.
If you pick the wrong stock doubling down can wipe your entire trading account.
That is the worst-case scenario.
So, this is dangerous!
Doubling down blindly under the illusion that you can recover the trade is a really bad idea.
While you might be lucky and benefit from doubling down because you’ll get enough of stock price oscillations, you only need one bad trade to destroy your stock trading account. And, we don’t want that to happen.
In this situation, the best way to recover from trade is to close it when the market proves you wrong, or the thesis behind your trade is no longer valid.
So, you can’t double down if you don’t know your stock holdings. Owning stocks without proper market research is risky when the stock price falls because you’re left in the dark not knowing what to do.
When to Double Down on a Position?
If you’re doubling down only to reduce your entry price purely because you’re wrong on the first trade, it’s a wrong approach. However, if you planned the trade ahead and established a potential price zone from where you expect the stock price to catch up, that’s a very reasonable trading strategy.
If you’re not good at timing the market, you can break up your order in small slices.
With this approach, you’re capping the risk and control your losses.
Secondly, you must ask yourself why did the stock decline?
If it’s part of a simple unforeseen broader market correction and the fundamentals haven’t been negated you can double down on your position.
Once you understand what has driven the stock price lower and the fundamentals still look good, then doubling down can be the right move.
Under certain circumstances, you can use the power of the double down trading strategies to your advantage.
Moving forward, we’re going to outline a double down trading strategy without the need to take on additional risk.