Trading: Don’t Throw Good Money After Bad

A gambler calls it “doubling down”, a trader calls it “cost averaging.” 

I don’t care what you call it, it’s the same thing.  There is nothing wrong with doubling down and there’s nothing wrong with cost averaging. 

The question you have to ask yourself is:  “why am I doing this?  Am I doing this because I am down huge at the blackjack table and need to get it back?” “Did I buy a call spread and the stock went straight down?”  

The answer to these questions will lead the way.  For example, if I am at the blackjack table and counting cards (theoretically of course) and the count just went through the roof off of one of my losers?  If that is the case, doubling down may make a lot of sense.  If you are trading options and there exists a set up where you would independently initiate a long (independent of your existing position) perhaps it is appropriate to “cost average.” 

THE BOTTOM LINE
Don’t throw good money at bad bets because you will not realize a loser.  There is always the next trade coming down the pipeline.  Allocate your funds to a set up with better expected value.