What Is Averaging Down?
In FX and stock trading, you often hear the term “averaging down.”
It refers to a strategy where you buy more after the price falls, lowering your average entry price.
In simple terms:
“I bought too high, but if the price drops, I’ll buy more cheaper and fix the math.”
Example:
- Buy 10,000 USD at 150 JPY per dollar
- Price drops to 145 JPY (mental damage included)
- Buy another 10,000 USD
In this case, the average entry price becomes 147.5 JPY.
The market doesn’t have to return to 150.
If it reaches 147.5, you’re already back to break-even.
Advantages of Averaging Down
- Lowers your average entry price (faster recovery)
- Works well in range-bound markets
- Can be a solid strategy with proper risk management
Especially in markets that move up and down repeatedly,
buying lower and surviving the rebound can feel like magic.
When it works, averaging down feels incredibly reliable.
Disadvantages of Averaging Down (This Is the Most Important Part)
- Once your capital runs out, the game is over
- Extremely weak against strong trends
- Very easy to lose psychological control
The most dangerous pattern is this thought:
“Come on, it’s already dropped this much. I HAVE to buy now!”
This is emotional averaging down.
Repeat it often enough, and before you know it,
most of your capital is locked into a single position,
leaving you completely stuck.
Main Types of Averaging Down
Fixed-Interval Averaging
You add positions at regular price intervals.
Example: Buy 10,000 units every 1 JPY drop.
Simple, predictable, and easier to manage.
Position-Size Scaling (Martingale Style)
You increase position size as the price falls.
Example: 10k → 20k → 40k → 80k…
Your average price drops quickly,
but so does your margin for survival.
One mistake in risk management, and you’re done.
When Averaging Down Can Work
- Range-bound markets
- Long-term accumulation-style strategies
- High-interest currency trades combined with swap income
However,
it is generally a bad idea in trending markets.
For example:
- Lehman Shock–level market crashes
- Long-term downtrends like the Turkish lira
Averaging down in these conditions
almost guarantees pain.
Rules You Must Have Before Using Averaging Down
- Decide in advance how many times you’ll average down
- Fix the total amount of capital you’ll use
- Define your final entry point beforehand
- If reality exceeds your assumptions, exit cleanly
Averaging down only works when it is:
designed from the start, not invented after things go wrong.
Conclusion: Averaging Down Is a Double-Edged Sword
Averaging down is a useful tool.
But used incorrectly, it leads to ruin very quickly.
I’ve personally gone in thinking,
“It’ll come back if I average down.”
Only to realize later that my funds were gone.
It felt like this:
“All-you-can-eat buffet confidence,
followed by regret and stomach medicine.”
Because I failed, I now know this for sure:
Averaging down can be both a weapon and a landmine.
If you’re going to use it,
use rules, not emotions.
Related Articles
- How I Blew Up My Account Trading USD/JPY During Economic Releases
- How I Fell into Another Trap with High-Interest Currencies (Part 1)
- How a High-Interest Currency Slammed Me with Reality (Part 2)
- High-Interest Currencies: Swap Appeal and the Double-Edged Sword of Averaging Down
I’m not fluent in English, but I really wanted to share this story.
So I tried my best using translation tools to write this post.
If you find anything that sounds strange, unnatural, or offensive,
please let me know in the comments.
I’ll check it carefully, translate your feedback, and fix it.
Thank you for reading!
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