What Is Averaging Down? Buying More as the Price Falls Lowers Your Average Cost, but Raises Your Risk
You buy, and the price keeps falling. The red number on your account keeps growing.
At this point many people think: “I’ll buy a little more to bring my cost down, and when it bounces I’ll be back to even.”
This is called averaging down. It is not an obscure technique — almost everyone who has traded has done it — and it is also where many accounts start to get into trouble.
This is part ten of MASQuant’s “Trading Academy · Beginner Essentials” series. The first nine parts covered contract specifications, lot size, leverage, stop losses, the spread, overnight swaps, the margin call and forced liquidation, the three order types, and going short. This part covers a move that is the exact opposite of a stop loss: when you are losing, instead of getting out, you buy more.
The short answer
Averaging down lowers your average cost, but it also makes your position bigger.
If the price keeps falling, your loss grows faster; with leverage, you also move closer to forced liquidation. Before you add, decide the most you are willing to lose.
What is averaging down?
Averaging down means that after you buy and the price falls, you buy another lot so that the average cost of your whole position (all your purchase prices averaged by quantity) goes down.
Short sellers average down too, in the opposite direction: after a short position the price rises, so they sell more to raise their average selling price. This article uses the more familiar long side for its examples.
Why averaging down looks like a good deal
(These are round numbers for illustration only, not market data; leverage and trading costs are not included)
Buy 1 unit at 100. The price falls to 90, and you buy another unit:
- Average cost = (100 + 90) ÷ 2 = 95
- The price only has to come back to 95 for you to break even — no need to wait for 100
You no longer need the price to return to your original entry; the bar for breaking even is lower — that is what makes averaging down so tempting.
But the price does not have to come back
The problem is that the price can also keep falling. Same example, and the price drops to 80:
| Buy 1 unit only (100) | 2 units after averaging down (100, 90) | |
|---|---|---|
| Average cost | 100 | 95 |
| Loss at 80 | −20 | −30 (20 + 10) |
| Every further 1-point drop | −1 | −2 |
Your average cost is lower, but your position is now twice as large. Every further point the price falls, you lose twice as much.
If you average down again at 80:
| Buy 1 unit only | 3 units after averaging down twice (100, 90, 80) | |
|---|---|---|
| Average cost | 100 | 90 |
| Loss at 70 | −30 | −60 (30 + 20 + 10) |
| Every further 1-point drop | −1 | −3 |
Your average cost has dropped from 100 to 90 and looks better and better; but at the same price of 70, your loss is twice that of the single unit, and the further the price falls, the wider the gap becomes.
Averaging down lowers “where the price has to return for you to break even”; what it raises is “how much you lose if it keeps falling”.
With leverage: closer to forced liquidation
The example above ignored leverage. When you actually trade with leverage, as part three explained, every position you open ties up margin; and as part seven, “What Is a Margin Call and Stop Out?”, explained, when your account’s equity relative to the margin in use (the margin level) falls to a certain line, the platform first issues a margin call and then carries out forced liquidation.
Averaging down pushes this ratio down from both sides at once:
- More margin in use: every add ties up another chunk of margin.
- The floating loss grows faster: with a bigger position, each point of decline costs more, so your equity falls faster.
So the more you average down, the faster your margin level drops and the closer you get to forced liquidation. And forced liquidation is not a stop loss — it is the platform cutting your loss for you, and where it stops is not your decision.
Planned scale-in vs. averaging down after a loss
Not every “buying in several steps” is a mistake. The difference is when the decision is made:
| Planned scale-in (decided in advance) | Averaging down after a loss (decided on the spot) | |
|---|---|---|
| Total size | Decided before entering | Added only after losing, growing bigger and bigger |
| Stop loss | One stop loss for the whole position, set before entering | Often none, or moved lower again and again |
| Maximum loss | Can be calculated in advance | Cannot be calculated; left to the market |
Part four, “How to Set a Stop Loss?”, said your stop loss belongs where you would be proven wrong; part two said your lot size should be worked backwards from “the most you are willing to lose”. Scaling in is the same: if, counting every entry, the total loss still stays within the limit you set in advance, it is a plan; adding because you are losing, on the other hand, is betting a bigger position that the price will surely come back.
Common mistakes
1. Using averaging down as a way to avoid taking the loss
Averaging down often happens when the price has already reached the place where your original view was proven wrong — by your plan you should have stopped out, but you added instead of exiting. Adding when you are wrong means enlarging your position at the worst possible moment.
2. Adding more each time, until the last add is bigger than the first
Some people double up every time they average down, hoping that “a small bounce gets everything back”. When the position grows by multiples, so does the loss, and the margin soon cannot hold.
3. Looking only at average cost, not at total position
Average cost is a comforting number; what really decides how much you lose is total position × how much further the price falls. Before you place an order, look at the position, not the cost.
Checking average cost and total position in MT5
- Open the Trade tab of the Toolbox (Ctrl+T). Every position is listed with its volume, open price (Price) and floating profit (Profit).
- On a Hedging account, buying the same instrument several times creates several separate positions: you have to add up the volumes yourself to get the total position, and work out the average cost yourself. A Netting account merges them into a single position and shows the combined average price directly. If you are not sure which one you have, ask your platform.
- The bottom of the same tab shows Margin, Equity and Margin Level. Before you average down, take a look: after one more add, where will this ratio fall to?
FAQ
What is averaging down?
Averaging down means that after you buy and the price falls, you buy another lot so that the average cost of the whole position goes down. On a short position it works the other way: after the price rises, you sell more to raise the average selling price.
How is the average cost calculated?
Average cost = the purchase prices averaged by quantity. For example, buying 1 unit each at 100 and 90 gives an average cost of 95; buying 1 unit each at 100, 90 and 80 gives an average cost of 90.
Why is averaging down risky?
Averaging down lowers the average cost, but it also makes the position bigger. If the price keeps falling, each point of decline costs a multiple of what it did before, so the loss grows faster; with leverage you also tie up more margin, so the margin level falls faster and you get closer to forced liquidation.
How is a planned scale-in different from averaging down?
With a planned scale-in, you decide before entering how much you will buy in total and where the stop loss for the whole position goes, so the maximum loss can be worked out in advance. Averaging down after a loss means adding on the spot: the position keeps growing and the maximum loss cannot be calculated.
How do I see my total position after averaging down in MT5?
In the Trade tab of the Toolbox (Ctrl+T), check the volume and open price of each position. On a Hedging account the same instrument is split into several positions that you have to add up yourself; a Netting account merges them into one and shows the average price. The bottom of the same tab shows the Margin Level.
Final thoughts
Part one said check the specification first, part two said calculate your lot size first, part three said margin is not a stop loss, part four said put your stop loss where you would be proven wrong, part five said being negative the moment you enter is normal, part six said account for overnight swaps if you hold overnight, part seven said do not let forced liquidation arrive before your stop loss, part eight said first decide whether this order needs the fill or the price, and part nine said put the stop loss on a short in place before you enter. This part is about the thought that comes up most often when you are losing: buy a little more and bring the cost down.
It is true that the average cost goes down. It is also true that the position gets bigger.
Remember averaging down like this: the average cost goes down, but the risk goes up — before you add, decide the most you are willing to lose.
Risk disclosure: CFDs are high-risk financial products and can lead to rapid loss of capital. Past performance does not guarantee future results. All strategies and backtests are for reference only and do not constitute investment advice. Averaging down enlarges both your position and your loss; margin rules and the margin call and forced liquidation levels vary by platform, instrument and account type. Please read our Risk Disclosure carefully before trading.
Further reading:
- How to Calculate Lot Size? With the Same $10,000, Gold and EUR/USD Can Differ by 6.7x
- What Is 100:1 Leverage? It Does Not Make You 100x More Money, It Lets You Carry More
- How to Set a Stop Loss? It Is Not How Much You Can Lose, It Is Where You Are Wrong
- What Is a Margin Call and Stop Out? Not Your Stop Loss, but the Platform’s Last Line of Defence
- What Is Short Selling? You Can Profit When Prices Fall, So Why Is the Risk Actually Bigger?
