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.
Let’s first start and explain in layman terms what does double down mean.
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.
“Sometimes by losing a battle you find a new way to win the war.”
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.
Let’s see how the double down trading works.
How Double Down Trading Works?
To explain how the double down stock signal works, we’re going to use a practical example.
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.
To only trade sound fundamental stocks that have the potential for growth.
To help you pick good stocks, check out the Complete Guide to Factor Investing, which combines benefits of both active and passive investing
Doubling down can be a bad trading practice only in one trading scenario.
Can you guess when not to double down on a position?
If not, we’re going to answer that question below:
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.
So, when is a good time to double down on a stock position?
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.
Double Down Trading Strategy
In this section, we’re going to explore how you can recover from a bad stock trade by reducing your breakeven point. The double down trading strategy can be used in situations where you own shares bought at a price above the market price and you’re holding a losing position.
This strategy can be used when you just want to get out at breakeven and you don’t care about making any profits. Traders also refer to this as the repair trading strategy.
Now, who of us can say he never was in a trade situation where you desperately just wanted to close the trade at break-even?
I guess not many.
So, how one can recover from a losing trade?
To give you an overview of how the repair trading strategy works, we’re going to look through a hypothetical example.
Let’s say we’ve got long 500 shares of Apple stock at $300 per share and the price has gone against us.
The way to fix this bad trade without adding any additional risk is to construct a butterfly option, which combines a bull and a bear spread.
Learn more details about the butterfly options trading strategy HERE.
The butterfly is specifically designed to limit risk. But, on the other hand, it also caps the upside gains. However, this doesn’t matter as we’re only interested to recover our losing position.
Here’s how to construct the butterfly spread:
- Buying the out of the money option with a strike price as your breakeven point
- Selling 2 call options for every 100 shares of Apple stocks owned
The total cost of buying the first option aka the premium is neutralized by the two call options. This will result in a free options position that will help us recover the bad Apple trade.
After you bought your 500 Apple share at $300 the stock tumbled to $200 as the fundamentals have shifted against Apple. In this situation, hoping for the stock to get back at your breakeven point is wishful thinking.
So, instead of taking the loss, we can use our double down trading strategy and take the following two positions:
- Buying 5 contracts of the 12-month $200 call – this gives you the right to buy 500 shares at a cost of $200 per share
- Selling 10 contracts of the 12-month $250 calls – this means that you could be obligated to sell 1,000 shares at $250 per share
In this situation, you brought your breakeven point down to $250 per share, compared to $300 per share.
Now, there are three possible scenarios that could happen:
- Apple stock goes lower: In this situation, you technically will continue to bleed on your long Apple share. But you will collect the premium from the options sold while the first option will expire worthlessly
- Apple stock price goes up a little: Let’s assume Apple shares are trading at $230. Now the bought option is worth $30, while the sold options expire worthless. You have still managed to recover $30 plus the additional premium collected compared to the initial loss of $100.
- Apple stock price goes up a lot: Let’s assume the Apple share are trading at $250. Now the bought option is worth $50 and the sold options expire worthless, but you can now close the position at breakeven.
The success of the repair trading strategy is in your ability to pick up the appropriate strike prices for the options used. The strike prices will control your break-even point.
Final Words – Double Down Stock Market
In summary, to be good at the double down stock market, you need to ignore your emotions and stick to the double down trading strategy. This will protect you when things get emotional because as a stock investor, you need to be anchored on your trading rules. The stock market is volatile and losses are part of the game.
Make sure you familiarize yourself with what does double down mean and all the concepts that can help you recover from a bad trade. Fixing a trade without adding any additional risk to the trade is an excellent opportunity to be used only in those extreme situations where you find yourself in a losing trade and the stock price has the potential to reverse.
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