Flattening, smoothing, or averaging down is a common behavior for many investors. That is when you buy on the way down to reduce your average cost.
Bottom fishing is also a common mistake made by investors, in trying to buy at the lowest price, the bottom.
Many experts said you need to train your mind to against human nature to become successful in investment. We think with proper mechanisms and tools, one can become disciplined without having to twist one’s mind.
The common mistakes could be caused by the conventional methods in evaluating stock – from personal cost and from a horizontal point of view.
Earning Channel, following channel trading principles and with the dynamic channel trading lines, can prevent you from flattening and bottom fishing most of the time.
Flattening is most likely to happened when
You bought before the price reached a top, but did not sell. You remembered the top and wished the price will come back, so when the price is lower than your original cost, you have the inclination to buy more to reduce the average cost.
You do not know the trend, and try to establish a long position in a down trend.
Why bottom fishing?
Bottom fishing often happens to more experienced investors.
The investor might have made a profit at or before the top. He or she then watched the price movement and bought when the price stopped dropping and coming back a little.
What are the reasons behind the common mistakes?
- See the price in a horizontal manner, remembering the key points of personal costs, the heads, and the necklines.
- Establish a long position in the down trend. Doesn’t have a basic understanding of price movement, or the channel.
- Don’t have sufficient understanding of the fundamentals.
- Don’t know how to identify tops or bottoms using the channel.
- Did not act properly at the previous top.
The bad exercises of flattening or bottom fishing that often cost you a lot can be avoided simply by following channel trading using Earning Channel.
Follow the principles:
- Don’t build a long position in a down channel (Not to buy on the way down)
- Take profit at the top
- Don’t have a long position that needs to be smoothed out
- Start to short when a down channel is formed. If you are not familiar with shorting, stay on the sidelines.
- Don’t buy until a new up-channel is formed
In the following, we’ll repeat the definitions of the channel, the principles of channel trading, and the implementation of Earning Channel. If you are already with them, you can skip it. However, it is advised to read them again and put them into practice again and again. When you are familiar with the usage of Earning Channel, you would subconsciously avoid flattening and bottom fishing.
We like to remind you to rule 1 and rule 3 of channel trading.
Rule 1: A channel must have two peaks and two dips. Don’t act before a channel is formed. (Avoid getting caught in bottom fishing)
Rule 3: Don’t establish positions in the wrong direction. Don’t buy on the way down. Don’t short on the way up. (Avoid flattening)
We also recommend you read other articles, such as
“Topping Patterns and Channel Trading”
“Bottom Patterns and Channel Trading”
Hope this discussion is useful to you. Good luck on your investment.
Appendix: The Basics of Channel Trading
What is a channel?
A channel is a specific form of an obvious trend.
- A channel is formed when the price moves in a waveform and has at least two peaks and dips (troughs) touching the resistance and supporting lines, and these two lines are about parallel.
- A channel indicates, in the period of time, people (little guys as well as institutions) think and act alike and are not in a panicking mode (the price movement is not straight up nor straight down).
- The longer the channel, the more touches the peaks and dips, the more reliable the channel is.
Channel trading actions.
How to make use of the channel to trade?
Earning Channel added four trading lines and two trading points to capture optimal timing for channel trading. The four lines are:
- Channel buy/sell lines for an up-channel, and channel short/cover lines for a down-channel
- Channel break-up line and break-down line.
A buy/cover line and a sell/short line are within the boundary of the two walls of the channel. A channel sell/short point is reached when the price touched the upper wall and bounces back to the channel sell/short line. A channel buy/cover point is when the price touched the lower wall and bounces back to the channel buy/cover line. A channel buy/short point is the optimal timing for you to build up a long/short position. A channel sell/cover point is a time for you to regulate your long/short position, and to take some profits.
The two other lines, channel breakout upward (break-up) and downward (break-down), are used mainly to guard the trading either for establishing a long position in an up-channel or a short position in a down-channel.
Please notice that all four trading lines are related to the channel lines, and thus when the price touches these lines it has nothing to do with your personal cost. It has to do only with the cost of all participants that moves the price. The default values of these lines in Earning Channel are percentages of the channel width.
Channel Trading Principles:
Rule 1: A channel must have at least two peaks and two dips. Don’t act before a channel is formed. Stay on the sidelines when the trend is unclear.
Rule 2: Go away, when a channel is broken. Back to rule 1.
Rule 3: Don’t establish a position in the wrong direction. Don’t buy on the way down. Don’t short on the way up.
Rule 4-1: Within a channel, use channel buy/short points to build up a long/short position.
Rule 4-2: Within a channel, use sell/cover points to regulate a long/short position.
Rule 5: Use channel break-up (break-down) to take proper profits from a long-term up-channel (down-channel).
Rule 6: Always use channel break-down (break-up) to stop losses to protect your positions in an up-channel (down-channel).
The Earning Channel software, as well as the articles, tutorials and suggestions in the website and social media, are provided as tools and references to help users develop their own market analyses and make their own investment decisions. Users are ultimately responsible for the way in which they use this information to invest in the stock market. Nothing associated with the Earning Channel or the information presented in articles and tutorials should be interpreted as direct advice on buying or selling of securities.