Average Down

Averaging down means buying more shares of a position you already own after its price has fallen, so that your average cost per share drops closer to the new, lower price. It's a way of responding to a losing trade by adding to it rather than exiting or leaving it unchanged.

Here's how the math works: if you bought 100 shares at $50, your average cost is $50. If the stock falls to $40 and you buy another 100 shares there, you now own 200 shares with a combined cost of $9,000, or $45 average per share. The stock only needs to recover to $45 for you to break even, instead of $50. That's the appeal — it lowers the bar for getting back to even.

The nuance that trips people up is that averaging down does nothing to change whether the original reason for buying was right or wrong. It lowers your average cost, but it also increases your total dollar exposure to a trade that is already moving against you. If the price keeps falling, losses accumulate faster because more capital is committed. Many traders confuse "lowering my average cost" with "reducing my risk," when in practice it's usually the opposite: more capital tied up in a losing position, with no new evidence that the trade will turn around.

Averaging down is different from adding to a winning position (sometimes called averaging up or pyramiding), where you add size because the trade is already confirming your thesis, not because it's failing to.