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Hi
Cramer lectured about this very fact. He indicated about using strict scales vs wide scales. Strict scales involve buying a stock at equal intervals as the stock price declines. For instance, for every $1 in share price the stock declines, you buy 5% or 10% using your Zecco account. Wide scales involves buying more shares as the stock goes lower. For the first $1 drop in share price, you may buy 1%, second $1 drop, 2%, third $1 drop 3%, fourth $1 drop 4%, and fifth $1 drop 5%. Then if it drops another 10%, you might buy an additional 25% bringing your total to 40% of your intended ownership. Then you try to see if the stock is still worth buying. You look at news, take a look at this year's or this quarter's balance sheet compared to last year or last quarter, cash-flow statement, and financial ratios (from the income statement). Once you reach 25% of your intended ownership, you need to make a decision; either you need to stop buying, sell if you think the Street may have underreacted to a bit of news or the financials have substantially deteriorated, or buy more because you really believe in the company. Likewise, you will need to do this with 50% and 75% of your intended ownership. You might be right or wrong with your analysis as the Street may have already priced in the bit of news or the deteriorating financials.
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