As a result from time spent on Twitter and in my stock chatroom tweeting trading ideas and reading people's responses, it is very alarming to me that most traders do not know how to calculate their average position cost in a trade (their breakeven point) --- and yes even some traders who have more than 5 full years of trading experience! Shocking right?
If a trader buys 1000 shares of $AAPL at $127, he or she knows that their breakeven point is $127 minus commissions/fees. But once a trader sells a partial amount like 300 shares, most traders do not know how to calculate their breakeven point on the remaining 700 $AAPL shares afterwards. And if you continue to add to the position, then exit partial, and add, and then exit, figuring out your average cost on the entire $AAPL trade is now even more of a headache. How do you figure out your average cost?
Take a look at my sample trading excel spreadsheet. You are all welcome to download it and use it for your own trading bookkeeping.
The basics of calculating your average price on a trade is fairly simple. Let's go back to our $AAPL example. To make matters simple let's assume I have zero trading commissions and fees. If I buy 1000 shares at $127 and then sell 300 shares at $128 for a profit, my average cost on the remaining 700 shares will be $126.57. The $300 profit on the 300 share exit is now reflected back into the remaining 700 shares. $300 profit divided by 700 shares = $0.43 / share. So now my average cost on the remaining 700 shares = $127 - $0.43 = $126.57. I can sell the remaining 700 shares at $126.57 and net $0 on the entire $AAPL trade. This is now my new breakeven point.
On long positions, profits on partial exits DECREASE your average price on the entire trade, and losses on partial exits INCREASE your average price on the entire trade. On short positions, the opposite happens.
Knowing your breakeven point on a trade helps you figure out when you want to exit it. Don't depend solely on your trading platform to give you an accurate average cost because most trading software do not, especially when you are constantly daytrading around a core stock position. Use an excel spreadsheet to record all your individual trades and figure it out to the penny. This is what I do on all my trades and recommend every day trader to do the same.
-Hubert Tsai