Break the habit! Stop averaging down on that POS, and other trading mistakes

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POOR HABIT TO BREAK #1: STOP AVERAGING DOWN!

                                                    Credit to Sooah Moon @bb2stocks

When you find yourself constantly average down on a stock, there is something seriously wrong. Aside from the obvious Dilution which you have no control over, "averaging down" over and over again on the same stock usually means three things:

...

1. The main trend line of the stock is DOWN -- there is no bottom in sight (you've heard this expression)

2. Every one of your prior entry was wrong, meaning you failed to confirm bottom reversal prior to entry -OR- you entered at a price point that has no meaning on the chart, the channel or Fib points...

3. You failed to exit immediately after making those poor entries

If your entry and exit are correct, there is no need to average down. Averaging down is different from "buying dips" on an opening position.

You don't keep averaging down EVER on a stock that has a main trend line that is nothing but DOWN for by the time when the stock hits a point of near zero recovery, you will own more shares than any one is willing to buy.

There are three main things we evaluate:

1. Pattern or Trend (we have to make sure there is a prior trend to be broken and that trend has to be broken for us to make an entry)
2. Intensity - how strong is the movement (technical indicators/studies for this to be covered in another thread)
3. Direction - what is the direction of the movement ( "  ")

Then, we look at entry and exit points. We do not make an entry before performing the 3 above and same applies to exit!

Next time you get stuck in a stock at the very top of the pps, learn to exit immediately and minimize your losses instead of averaging down. The proper way to average down--if you had to--on an "investment gone wrong" is to TRADE minor trends for a profit and to make sure you exit unharmed when you close out the entire position.

HOW TO AVOID BUYING OTC PIGS AT THE TOP

                            Credit to Sooah Moon @bbs2stocks

We discussed in various rooms that there is no need to do a full blown DD on any OTC pig because it's same crap, different pig. On OTC pigs, we basically "play the play" and "play the chart." However, it is utterly foolish not to do any sort of fundamental DD even on a pig.

Some basics you have to check to avoid buying the top are:

1. Share Structure (A/S, O/S, Float)

2. Capitalization (Look at Statement of Shareholder Equity)

3. Derivative liability in the balance sheet

It takes about 30 minutes to scour the filings to check the above.

On $DROP as an example, you'd see that the issuer issued a very small number of common stock by applying a great portion of investor's initial funding to additional paid in capital which gave the illusion that the value of the company or shareholder equity was much higher than in actuality. This points to how management chose to treat capitalization together with their initial investors. $DROP decided to issue almost no shares while $MTVX chose to issue 20B shares from the get go. These extremes "too much or too little" are RED FLAGS. These finite details are key to understanding how your 'investment' in OTC stocks might faire.

Based on this type of trick, the company also issued convertible notes with a conversion price of $4.00 per share and later at 0.02 but with a clause that stated 60% discount to the lowest average...etc. There is ambiguity in the language of the convertible note agreement. This is done for a reason--these are all tricks. The SEC does not get involved in Rule 144 offering disputes between lenders and issuers so the word "and" is subject to interpretation. This is where attorneys come in to write legal opinion letters to clear stock certificates.

Derivative liability (D/L): These have to be marked at fair value hence as the stock price moves down, D/L increases in the Balance Sheet because they have an inverse relationship. Before you know it, you'll see D/L blowing up like a pig without a company taking on additional debt. The reason is that D/Ls are a function of share price. D/L increases as the stock price moves below its par value. When stock is issued below par value, a charge called "accretion cost" must be booked on the P/L side and the credit side is the D/L...

So on $650K worth of convertible debt, legacy lenders could be entitled to up to 1 billion shares on something like $DROP and they will wait until they can get the most amount of shares. This is the name of the game in OTC land.

POOR HABIT TO BREAK #3: DON'T HOLD TOO LONG!

                                          Credit to Sooah Moon @bb2stocks

OTC Pigs are not meant to be held, or held long for that matter. They are meant to be traded. The "hold time" for pigs is getting shorter and shorter as the OTC and traders lost big $$ this year from many MMJ SEC shutdown. Everyone is trying to rebuild and preserve capital hence we all must do the same. 

"Don't Hold Too Long" is another expression for "Don't Get Greedy" and "Don't Be a Sheep"

1. Don't Get Greedy

If a 100% gain presents itself to you, TAKE IT and RUN. Yes, you could leave cash on the table but the taming thought here is this: How many and how often do your plays go 100%? If a 100% is the norm for you, please ignore this part but I am willing to bet a big chunk of my life that 100% gains are more rare than the norm. 

By trying to squeeze another 14% to 32% out of a 100% runner, you could be sacrificing your 100% gainer.

2. Don't Be a Sheep

Someone--the most notorious person in all of OTC--told you that stock XYZ is going to da moon so keep holding. If there is a known, forward looking event coming on a stock and it's a week away, sure, it is ok to hold but most of the time, you really should not be holding more than 10 sessions after a buy-in. Forward looking events have to be justifiable, whether they were a guidance given by an issuer or a known formality based on regulatory guidelines. 

If we have money riding on a stock that has been basing for more than 7 sessions, we really have to keep a close eye on it (Bollies squeezing) because the price can correct in either direction...and when news finally hits, it might not be the one that we were looking for. 

KEEP YOUR LOSSES MANAGEABLE Credit Sooah Moon @BB2Stocks

If you aren't consistently meeting your daily or weekly goals, go back and re read this article from the beginning.

What you should focus on is the SIZE of your opening position relative to VOLUME and setting a working EXIT strategy.  "Entering a play and only planning on where to take profit is a mistake, plan your exit strategy as well if things go south."

If your "buy-in" is too big relative to volume traded, your exit becomes challenged as you're met with competition as you try to exit With diminishing price and volume, you're almost guaranteed to be a bag-holder, so PLEASE do not over buy a position no matter how much you like the stock. The point to keep is not always about what % gain you could achieve on a play but also what % loss. Keep these in mind, always.

If you had a loss over $500 on any play this week, your entry was either totally off or you bought too much stock for that play. Even if you got the entry right, you held too long and that could also cost you, so I kindly suggest that you re-visit your personal strategy again and firm it up.

Learn to exit a bad entry quickly and keep your losses manageable, folks. Your losses for exiting a bad entry should be minimal, and you should even feel good for taking a loss sometimes.

SUNK COST FALLACY 

What is "Sunk Cost Fallacy?" Often times on twitter you will see me interacting with someone who is holding on to a stock or coin they should have sold a long time ago, and I tell them to google this phrase - 

https://youarenotsosmart.com/2011/03/25/the-sunk-cost-fallacy/

https://en.wikipedia.org/wiki/Sunk_cost

I don't know about you but I have been in the situation many times where I was down on a stock/coin, and whenever I had new funds I kept "averaging down". I figured that since I already had my money in and thought it had to bounce eventually, I might as well make my money back in that play. Right?  WRONG

You should be thinking about your funds very carefully and protecting them, throwing good money after bad money is a big mistake and an easy one to make. I lost over $250,000 doing this in one OTC play.

The lesson? Cut your losses quick, especially if it is a loser. Move on and use your funds for a play that is not locked into a downtrend.

Welcome to Chedsblog!   

-Helping new traders avoid my old mistakes-

OTCBB Pennystock trading article topics include:

Reading financials and filings

Market makers 

L2 and chart analysis

Understanding the competition

Using social media to trade

Price and volume study

Bankroll management

Game theory

Sub .01 low float setups

Interviews with influence makers

OTCBB Penny Stocks Trading Market Makers L2 Charts Technical Analysis Financials Learning Discipline Networking Planning Bankroll Management Taking Profit Paper Trading Options Nasdaq NYSE Small Cap Stock Picks Alerts Bashers Growth Pennystock Sub Penny List Stop Loss Top Hot

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