The Math Behind Scaling into Your Investment Positions

in triptolemus •  4 months ago

So yesterday I posted about scaling into your position to lower your risk profile and potentially increase your profits.

Scaling into a position means that you're buying your positions slowly over time so that you can average the price that you get in to a stock or crypto... By doing this, you're able to mitigate the possibility of the crypto or stock going down the day after you buy it (assuming you bought all at once).

If you buy slowly over time, then you get the average of each time you buy in!

I figured that this could be a little confusing for some, so I decided to put some numbers behind this example:

Imagine that your plan is to buy 1000 STEEM and you decide to buy it over a 4 week period of time:

  1. During week 1, you see the price hovering between $2.10-$2.30. You buy 1/4 of your position (250 STEEM) at $2.15
  2. During week 2, the price has gone up slightly to $2.50 and you buy another 1/4 (250 STEEM) at $2.50. The average price of the 500 STEEM that you've bought thusfar is $2.325.
  3. During week 3, the price has come down quite a bit to $1.90. You buy another 1/4 (250 STEEM) at $1.90. The average of the 750 STEEM that you've bought thusfar is now $2.183
  4. The markets have steadied and the price is still sitting at $1.90 and you decide to buy another 1/4 (250 STEEM) at $1.90.

The final average for the 1000 STEEM that you've bought over this 4 week period of time is $2.11.

As you can tell, if you would have bought all your position at week 1, you would've ended up with a slightly higher buy-in price.

If you would've bought during week 2, then you would've gotten a much higher buy-in price.

Buying in weeks 3 and 4 would've given you the best advantage, but nobody can predict markets perfectly. There is no way to know when the "best" buying opportunity is. For this reason, averaging into positions is the most sure-fired way of getting a good buy-in price.

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I belive in setting a target prince buying then

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Thanks!

Bien las matemáticas son lo mejor. aunque la teoría quijada dice que los números no existe,,,,...

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Gracias por leer friend!

When I first got into crypto I got burned a few times by purchasing with lump sums rather than dollar cost averaging. But lesson learned, should especially take care with the sideways market movement right now.

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Yes. Dollar cost averaging is the key

I prefer setting tight stop losses and buying only once. Dollar cost averaging backfires on you when the price goes up and you didn't have time to buy enough. If it moves against you, you sell and move on with your life. Buying lower and lower can seriously wreck your capital if you are in a bear market like we are now.

Exactly, nobody can predict the market perfectly. I'm not at loss since I hadn't bought Steem all these while. I really hope the value of Steem would rise. Nice one @triptolemus. Thanks

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Totally. Steem will definitely rise! And hodling is a great way to try and not predict the markets!!

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True @triptolemus. I agree!

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yup sounds logic here good job!

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Thanks!

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I understand the concept but due to book keeping I tend to buy in bulk to minimize transactions. I just don't want to deal with the tax hassle later.

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Ahh I suppose that makes some sense. I prefer to break it up into weekly chunks

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