moneymarketing wrote on 14
th Sep, 2017 at 8:49am:
So here is a mental exercise for you. I think you have said in the past you might be interested in trading. So lets use this BTC example. Your BTC has dropped. You have some cash. An equal amount as you put into the BTC trade.
What should you do with it and your BTC stake? It can only go up, down or nowhere (sideways).
What should you do with your cash and your stake based on what you think you should do in all three cases?
In other words if it can go up, what do you do (buy, hold or sell which stake, cash or BTC). Down, what do you do? Sideways, what do you do?
I taught myself this exercise for trading as a way to force my decisions
Actually, this is a good time to revisit this theory.
Since the price has returned to its value this shows why these are good questions to ask yourself as a trader.
So the price is at $4300.
Let's say you had bought at $4300 and the price dropped to $3500. Do you buy, sell or hold?
If you say hold, then you are really saying you don't believe the price will go down further. If you do think the price will go down further, then you should really sell and then determine if you want to buy in later at a lower price. That makes sense right?
So if you don't think the price will go down further and you want to hold, then what you are really saying is that the price will stay flat for a time or will go up again. If you honestly think the price will go flat for months or years, then you should sell and put that money to work someplace else. Otherwise, inflation will erode its value and you will lose potential gains somewhere else (otherwise known as opportunity cost)
If you think the price will return to its original value at $4300 where you will breakeven, then what you are really telling yourself, is that you should buy. Because, with a stake at $4300 and a stake at $3500, the value of the two back at $4300 will give you a gain over that time. Not only will you have lost nothing, you will have gained.
If you just wait for your stake to return to its original value, you would have lost time and money due to inflation
So to recap.
If it goes down and you don't want to buy more because you think you can lose more, then you should sell your original stake.
If you want to hold thinking it will stay there you should sell and invest somewhere else.
If you want to hold and wait for breakeven you should buy more. Your breakeven will be lower and your old breakeven will give you a gain
So if you had bought more when it dropped below $4000, you would be sitting on a nice gain as it is now at $4300.
So assuming you bought and are sitting on a gain, do you now sell, hold or buy more?
And thus the cycle starts again
So you see, being a trader is about asking yourself the right questions. Most people, when their stock drops ask themselves the wrong questions