There are several schools of thought when it comes to the idea of doubling down or adding to a losing position. Is there a correct, one-size-fits-all answer? Deciding on whether or not to double down depends on several key factors and the context in which such action might be taken.
Here are a few key questions to ask yourself before doubling down on a trade or position:
- Will I be overleveraged?
- Where will I exit if still wrong?
- Is this a short-term trade or a long-term buy and hold?
- Am I using cash or margin?
- Can I deal with further losses on the position?
Short-term trading with leverage:
Day trading futures contracts, for example, may be a scenario in which doubling down may not be advisable. Just because you buy crude oil at $50 and then again at $49 does not mean it can’t keep going to $48, $47 or even lower. Due to the leverage involved, losses on such a trade can mount rapidly and blow your account to smithereens in the process. The same could be said for buying shares of stock ABC at $80, then $79.80, then $79.40, etc., etc. While sometimes doubling down may help turn a loser into a winner, at times markets simply keep going higher or lower throughout the entire session, and doubling down will simply add to the pain and losses.
Long-term buy and hold strategies:
A long-term buy and hold scenario may be a case where doubling down makes sense. Assume for a moment that you like the long-term prospects for stock XYZ, which also pays a dividend. You plan to hold the shares for years to come and are buying the stock for the long haul. In this case, let’s assume you start buying shares at $20. If the stock dips down to $18 and your long-term objective has not changed, then buying more shares at $18 would lower your overall cost basis to $19. The gold and silver markets represent another possible scenario in which doubling down could potentially make sense. If you are acquiring physical gold and silver as a long-term buy and hold investment, then buying more gold and silver on price declines may make sense and lower your long-term cost basis.
Only you can decide when doubling down is the right move. Beware, though, that such a strategy can be especially dangerous when leverage is involved, or your position is short-term in nature. Many an account has been completely wiped out or worse by such a strategy. Make sure you carefully consider your objectives and risk tolerance before implementing this approach.
