Lessons › Why traders lose › Averaging down
World 11 · Why traders lose · lesson 19 · level 2
Averaging down
Averaging down lowers your average price but grows your position, so the same fall can cost three times the loss you planned.
In one line
Price falls, so you buy more. Your average price drops and it feels smart, but it is the first of five traps.
Explained simply
Averaging down means buying more as price falls. You buy 10 coins at $100, then 10 more at $95: your average is $97.50, and getting back to even feels closer. But you now hold 20 coins, so every $1 drop costs $20. In our data, after a stop, the give-up price, was hit, price came back to the buy price first 52% of the time, which is why it feels smart. But 39% of the time it first fell the same distance again. In this example, that is $90: a $150 loss, not the $50 you planned.
A worked example
An example: you buy 10 coins at $100 and plan to give up at $95, a $50 loss. Instead you buy 10 more at $95, so your average is (100 + 95) ÷ 2 = $97.50. At $90, the first 10 lose $100 and the next 10 lose $50: $150 in all, three times the plan.
Mistakes to avoid
- Buying more of a losing trade to lower the average price.
- Forgetting that a bigger position makes every $1 drop cost more.
- Skipping your planned stop because the new average looks closer.
- Deciding your size one buy at a time instead of before the first buy.
Check yourself
You buy 10 coins at $100 and 10 more at $95. What is your average price?
$97.50. (100 + 95) ÷ 2 = $97.50. The average drops, but you now hold twice as many coins.
After adding, you hold 20 coins instead of 10. What does each $1 fall now cost you?
$20. 20 coins × $1 = $20, twice what it cost with 10 coins.
What is the fix for averaging down?
Decide your full size before the first buy. Plan the whole position before you start, and never add to a loser to rescue it.
After 979 hit stops, price came back to the buy price first in 52%. Why is averaging down still a trap?
In 39%, price first fell the same distance again. 52% is why it feels smart. But in 39% price fell another stop-distance first, and with twice the coins that loss is three times the plan.
You buy 2 coins at $50 and plan to give up at $45. You buy 2 more at $45 instead. At $40, what is your loss?
$30. The first 2 coins lose $10 each and the next 2 lose $5 each: $30, three times the $10 you planned.
Goal of this lesson: Decide your full size before the first buy, and never add to a losing trade to rescue it.