What is average down?
Average down is an investing and trading strategy where a trader buys additional shares of an asset after its price has fallen, in order to reduce the average cost per share.
This approach is based on the idea that buying at lower prices improves the overall entry price.
In simple terms, average down means buying more when the price drops to lower your average purchase price.
How averaging down works
Averaging down works by increasing position size while lowering the overall cost basis.
The new average price is calculated by dividing the total investment by the total number of shares held.
This reduces the price required for the position to break even.
However, it also increases exposure to the same asset, which can increase overall risk.
Example of averaging down
Suppose a trader buys:
- 100 shares at $50 → total $5,000
The price drops to $40, and the trader buys another 100 shares:
- Additional investment: $4,000
Now the total investment is $9,000 for 200 shares.
This means the price only needs to rise above $45 for the trader to break even, instead of returning to $50.
If the price continues falling, however, losses can increase significantly.
Average down vs average up
Averaging down is often compared with averaging up.
Key difference:
Both strategies adjust the average entry price, but they reflect different trading approaches.
Advantages and risks of averaging down
Advantages
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Lowers the average cost per share
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Reduces the price needed to break even
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Can improve returns if the price recovers
Risks
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Increases exposure to a losing position
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Losses can grow if the price keeps falling
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May reinforce poor trading decisions
Averaging down works best when the price drop is temporary and the underlying asset remains strong.
Risk Warning: Trading CFDs involves significant risk and may not be suitable for all investors. Losses can exceed your initial deposit. Please ensure you fully understand the risks involved before trading.
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