As of 10/25/2021   Indus: 35,741 +64.13 +0.2%     Trans: 15,874 +102.32 +0.6%     Utils: 918 -3.65 -0.4%     Nasdaq: 15,227 +136.51 +0.9%     S&P 500: 4,566 +21.58 +0.5%	YTD  +16.8%    +26.9%    +6.1%    +18.1%    +21.6%	Targets    Overview: 10/14/2021     36,000 or 34,600 by 11/01/2021   16,100 or 14,500 by 11/01/2021   925 or 860 by 11/01/2021   15,400 or 14,200 by 11/01/2021   4,600 or 4,250 by 11/01/2021
CPI (updated daily): on 10/8/21

As of 10/25/2021   Indus: 35,741 +64.13 +0.2%     Trans: 15,874 +102.32 +0.6%     Utils: 918 -3.65 -0.4%     Nasdaq: 15,227 +136.51 +0.9%     S&P 500: 4,566 +21.58 +0.5%	YTD  +16.8%    +26.9%    +6.1%    +18.1%    +21.6%
Targets    Overview: 10/14/2021     36,000 or 34,600 by 11/01/2021   16,100 or 14,500 by 11/01/2021   925 or 860 by 11/01/2021   15,400 or 14,200 by 11/01/2021   4,600 or 4,250 by 11/01/2021
CPI (updated daily): on 10/8/21

Bulkowski on Zero Cost Averaging

Here is a money management technique called zero cost averaging, and it is based on an article from the April 1998 issue of Stocks & Commodities magazine by Terrence Quinn and Kristin Quinn. It has nothing to do with moving averages or non-moving averages, or dynamic moving averages, or weighted...well, you get the picture.

• Opening Position
• An Example
• Flaw! What Flaw?
• Options. No, Not That Kind!
• See Also.

Zero Cost Averaging: Opening Position

The idea behind zero cost averaging is to sell enough shares for a profit to equal the cost of those shares without selling them all. An example makes this clear.

Suppose you buy 1,000 shares at $6 each, for a cost of $6,000. If the stock rises to $10, you want to sell enough shares to get back your original cost and hold the remaining shares essentially for free.

You can hold them forever and not lose any money on the transaction, even if the stock were to go bankrupt (of course, the government doesn't see it that way. When you finally do sell those shares, they IRS will want to take their share. Think of it as your contribution to fund huge bonuses for CEOs when the government loans them your money).

Zero Cost Averaging: Flaw! What Flaw?

The flaw in this strategy is that it requires price to move up in order to sell shares at a profit to get your money back.

What if we create rules that say,

• Buy 50% more shares if price drops 25%.
• Sell 50% of the shares if price climbs 33%.
• Keep 100 shares or more at $0 cost then stop trading.
• Always round up to the next 100 shares (a round lot) when trading.

The following table shows a sample trade when the price bobs up and down between $9 and $12.

• 1. Buy an initial stake of 600 shares at $12 per share for a total cost of $7,200.
• 2. Since price has dropped 25% to $9, buy 50% more shares (300) for a cost of $2,700 for a running cost of $9,900.
• 3. Price has climbed 33% back to 12, so sell 50% or 450 shares. Since this is an odd lot, increase the share total to 500.
• 4 to 6. Continue buying and selling.
• 7. During steps 1 through 6, we check if selling all but 100 shares would result in zero cost. If so, then we sell those shares and quit trading. In this case, selling 400 would make $4,800, leaving us with a profit of $900 and 100 shares in our portfolio at zero cost.
• 8. Stop trading this stock because we have at least 100 shares at zero cost.

Zero Cost Averaging: Options. No, Not That Kind!

I chose 33% on the buy side instead of 25% to get the numbers to work out evenly. You can chose any numbers you want for the buy and sell sides.

If price were to drop from $9 by 25% to $6.75, you would buy 50% more shares following the rules outlined. If it climbed from $12 to $16 (33% more than $15), you would sell 50% of your holdings, rounded up to the nearest 100 shares (or rounded down if selling would leave you less than 100 shares). At each step, check to see if selling all but 100 shares would leave you with at least 100 shares and a profit. If so, then sell those shares and stop trading this stock.

If you zero cost average like this, you can build a diversified portfolio of many stocks held at zero cost. If any of the stocks were to go to $0, you would not lose any money. Again, all of the numbers are flexible here. You can buy and sell at 10%, 20%, or 50% increments (or whatever). You can look for 1,000 shares at zero cost instead of 100. You can use dollar values instead of percentages, like buy or sell if the stock price changes by $3 and only trade 200 shares at a time.

-- Thomas Bulkowski

Begin your journey to becoming a better trader or investor by buying a copy of my book, Trading Basics, picture on the left. It's full of tips and ideas. It's the first book in the "Evolution of a Trader" trilogy.

If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski

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