Averaging Down and Averaging Up
Averaging down is buying more of a position that has fallen, which lowers the average entry price but increases exposure to a trade that is already going wrong. Averaging up is buying more as the price rises.
Averaging down means buying more of something after its price falls, which lowers your average cost. Averaging up means buying more after the price rises, which raises it. Both make the position bigger. Averaging down is risky because it adds money to a trade that is already losing.
- Category
- Risk Management
- Reading time
- 3 min
- Also called
- Averaging down, Averaging up, Adding to a position
- Updated
Averaging in plain words
Averaging up or down means adding to a position you already hold after the price has moved.1
Buying more at a lower price pulls down your average cost — and with it your breakeven price.2
Buying more after a rise does the opposite: it lifts your average cost.1
How to decide before adding
Recheck the reason
Ask the key question first: do you have good reason to expect a recovery?2
Work out the new average
Each lower-priced purchase lowers your average cost and breakeven.2
Check total exposure
Bigger buys at lower prices cut the breakeven faster, but they also enlarge the position and the possible loss.2
Plan the worst case
If the price keeps falling, you now lose on more shares than before.1
Know the cost of averaging up
When averaging up, accept that each purchase raises your average price.1
Set a limit
Decide in advance how much more you will add, since adding is still buying more of an existing position.1
Worked examples
Example 1 — Averaging down
Average 35A hypothetical trader buys 10 shares at 40 and 10 more at 30.
| Cost | 400 + 300 = 700 |
| Average | 700 ÷ 20 = 35 |
Buying more at a lower price reduces the average cost (breakeven point) of the position.2
Example 2 — It keeps falling
−200The same hypothetical 20 shares fall to 25.
| Value | 20 × 25 = 500 |
| Loss | 500 − 700 = −200 |
Averaging down enlarged the position, so the further fall cost more than the original stake would have.1
Example 3 — Averaging up
+120A hypothetical trader buys 10 at 20, then 10 at 24; price reaches 28.
| Average | (200 + 240) ÷ 20 = 22 |
| Gain | 20 × (28 − 22) = 120 |
Buying after a rise will increase the average cost paid, but here the position still gained.1
Averaging down vs averaging up
| Aspect | Averaging down | Averaging up |
|---|---|---|
| Buys after | A fall | A rise |
| Average cost | Lower | Higher |
| Adds to | A losing trade | A winning trade |
| Main risk | Bigger loss | Thinner cushion |
Where it comes up
Position sizing
Fitting adds into Position Sizing.
Scaling
A form of Scaling In and Out.
Regular investing
Compared with Dollar-Cost Averaging.
Break-even
Moving your Break-Even price.
Advantages and disadvantages
Advantages
- Averaging down lowers breakeven.
- Averaging up adds to what is working.
- Can be planned in advance.
Disadvantages
- Averaging down adds to losers.
- Exposure grows.
- Recovery is not guaranteed.
- Averaging up raises the cost.
Going deeper
Read as far as you need. Each level builds on the one before it.
The maths
Beginner
Adding at lower prices lowers the average cost, so a smaller rebound gets you back to breakeven.2
The assumption
Intermediate
The whole approach relies on one assumption — that the price will come back.2
The risk
Advanced
Larger purchases at lower prices increase exposure and potential losses, and losses could be greater if the price keeps falling.1
Common mistakes
Averaging down without a reason
Recheck why you bought.
No limit on adds
Set a maximum size.
Ignoring the stop
Keep your exit plan.
Mixing it with DCA
DCA is planned in advance.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Averaging down buys more after a fall.
- Averaging up buys more after a rise.
- Both make the position bigger.
- Averaging down assumes a recovery.
- Set limits before adding.
Frequently asked questions
Is averaging down bad?
Is it the same as DCA?
Why average up?
Further learning
- Position Sizing
How big to go.
- Scaling In and Out
Adding in steps.
- Dollar-Cost Averaging
A planned alternative.
- Stop Loss
Limiting the downside.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Questrade. Averaging up and down (opens in a new tab) Checked .
- CMC Markets. Averaging down stocks: Strategy, examples and when to use it (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.