Hit-The-Supports vs Averaging Down

Hit-the-supports and averaging down are investment strategies employed by stock traders and stock investors to time their entries into the stock market. Hit-the-supports strategy involves buy orders at new lows and is a counterpart to another extreme side known as hit-the-resistance which involves buying the stock at new highs. It is a strategy to enter the depressed market at the best possible timing, which implies that the stock may have reached its bottom using various TA indicators to measure the price dive. The buy order interval is an one-time, sharp and straight purchase at that best possible price, unlike averaging down which involves multiple purchases at different prices. There are differences the two.

1. Level of Experience

Hit-the-supports strategy requires experience and skills needed by the investor. It is used by both very short-term traders and mid-to-long-term stock investors. This strategy requires the investor to have certain experience on technical analysis using graph charts and technical indicators to predict further possibilities for the price to dive. If various indicators tell the investor that there are little rooms for more price dives, it implies that the stock may have bottomed out and could be ready for a new bullish rally.

Averaging down is a layman strategy. It involves the investor making multiple purchases at different prices while the market is still depressing. There are downsides to it, however. This strategy is most likely suitable for rich investors who are too lazy to care about technical analysis but willing to fork out a lump sum to net up shares at different prices to lower down the average dollar cost. But for small investors like me, I would most likely run out of steam before the stock bottoms out. I have since ditched this strategy in favour for the hit-the-supports after accumulating certain experience on technical analysis.


2. Size of Funds

 

Using the above graph chart as a reference, in the period between the first and the third week of August, Starhill Global experienced a significant price dive from $0.66 to $0.585. Investor A employing the averaging down strategy would make multiple 1-lot purchases at, let say, $0.65, $0.60, $0.59, and $0.585, for 4 lots amounting to $2425, with an average dollar cost of $0.606 per share. Another investor, Investor B employing the hit-the-supports strategy would make a single 1-lot purchase at the support line of $0.585, amounting to only $585. Which one is better? If you have limited funds but experienced in technical analysis and knew where is the likely bottom support line of the stock, go for the hit-the-supports.

3. Rate of Rebounding

With reference to the above graph chart, Investor A has bought 4 lots of Starhill Global at different prices, with an average dollar cost of $0.606 per share. When the stock finally rebounded slightly at the end of August from $0.585 to $0.625, Investor A enjoys 1.9% capital gains. But for Investor B, with an avearage dollar cost of $0.585, enjoys 4% capital gains, which is a double of what Investor A enjoys.