Trading Tips: How and When To Average Down

So in the traditional stock market in trading parlance, you might hear about averaging down, and that being a viable strategy over time. I’m actually very skeptical about ever averaging down in a stock. And today, I’m gonna tell you why.

So today, we’re gonna talk about averaging down. And if you took a high school class or possibly a college class or maybe you’ve read some of what I call the old school methodology, they may talk about averaging down.

You know, the idea is you’re buying at a discount, you’re lowering your cost basis. So, let me start out by explaining what averaging down is. Then I’ll explain why I don’t think you should do it. And then, why I don’t think it’s ever a viable strategy.

So, when you’re averaging down, the idea is you bought a stock at say $10, and the stock has now dropped to $8, okay? If you buy a hundred shares at 10, and you buy a hundred at eight, your average cost basis is now $9.

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So, you’ve lowered your cost basis, which that way the idea is, you bought at 10 because you believed in the stock, you bought more at eight, you brought your cost basis down, so that if and when the stock trends back, you’re in the green, you know, in this scenario, you’re now green when the stock hits 9.01, okay?

Whereas, in the past, if you hadn’t averaged down, the stock would have had to get back to $10 or 10.01, for you to be “in the green.”

Sounds great, and in my opinion, it only sounds great. I don’t think it plays out over time because, especially in these lower-priced stocks, these volatile stocks that we love to trade, so many of them just never come back, okay?

Momentum Stocks

We’re talking about momentum stocks. We’re talking about $1 stocks, $2, $10 stocks. We’re not talking about Apple. We’re not talking about Amazon.

I’m guessing you’re on this blog, you want to learn how to trade. You’ve probably got a small account. You can’t trade a $1900 stock like Amazon. You can’t buy one share, much less 10 or 100 or 1000 shares of Amazon to make real money.

So, averaging down in Amazon or Apple or Microsoft is one thing. If you’re averaging down in a momentum stock, a big runner, you’re just setting yourself up for disaster, really.

Because so many of these stocks spike, fail, and never come back. So, that’s why I think it’s just something to never, ever try to do. And most of what happens to traders is you know, they refuse to admit they’re wrong.

They can’t accept the loss. They become a bag holder. There’s nothing worse than being a bag holder. What you’re doing there, is you’ve decided I’m not gonna take this loss, I can’t be okay with being wrong, I’m gonna add lower and I’m gonna hope and pray that this stock spikes back someday.

That is loser mentality. That is why 90% of day traders fail.

You wanna have a winner mentality. You wanna be adding to winners. Not adding to losers, okay?

It’s counterintuitive, I get it. But if you’re in a big running stock with news and a hot sector, and it’s gone from one to two, you bought at two, now it’s at three, add higher.

Yes, you’re raising your cost basis, but you’re adding to a winner. That’s what successful traders do over time. Adding to a loser in low-price stocks is never viable over time.

You might get lucky here and there. You’ll add, add, add, add, add, and then the company gets bought out, and you think it’s gonna work again. You got lucky once. That’s not how you become consistently profitable. That’s not how you succeed over time.

So, in summary, let me know below. Have you added to a loser, and have you made it work? Because I’d be curious to see the comments.

But you know, if you want, post under an anonymous account because I would like to know, if you’ve ever add, add, added to a loser and made it work. I’m guessing a significant majority of the comments are gonna say no.

In summary, have that winner mindset, not the loser mindset. Add to winners, never losers. Cut those losers, let your winners run. That’s how you become consistently profitable over time.

Thanks for reading our article.

Beer buff. Incurable zombie guru. Amateur introvert. Avid writer. Typical bacon junkie. Trader.