Today's Quote: “I buy when other people are selling.” J. Paul Getty.

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

LESSON #3: BUYING VERSUS ACCUMULATING

Stocks making bottoms must be handled differently than stocks that are well into their established trends. It is our belief that traders should buy stocks that are trading in up trends, while investors should accumulate those that are in the process of bottoming. There is a major difference. Buying implies a one-time purchase at one specific price, while accumulating involves multiple purchases spread out over multiple time frames and prices. The latter approach provides for two forms of diversification time diversification and price diversification. The only other form of diversification that exists is stock diversification, which calls for spreading your bets over multiple issues. While we are not very big promoters of stock diversification, applying all three forms can prove beneficial at times, particularly when finding an intermediate to long-term play in which to invest.

Editors Note: Another term tossed around a lot is ‘averaging down’ and that is neither ‘accumulating’ nor is it ‘buying a trend’. It is a deadly combination of both where traders make what they believe to be a ‘one time purchase’, and then when it does not work, that add more shares rather than stop out. This differs greatly from planning to accumulate in an area, because you lose all money management parameters when ‘averaging down’, you don’t when accumulating. Averaging down is without a doubt why more investors go broke than any other reason.