What Is Averaging Down in Trading?

The arithmetic: adding at lower prices pulls the average cost down, so a smaller recovery returns the position to breakeven. That same arithmetic is the trap — the position's recovery gets easier while your exposure gets larger, and the account's risk doubles into the falling knife the plan never priced. Whether the second entry is a tactic or a fall depends entirely on paperwork: a planned scale-in has its trigger, size, and thesis-recheck written before the first entry; everything else is loss chasing wearing the tactic's name.

The honest test is four questions. Was the addition written in the plan before the first entry? Is its size pre-committed (a fraction of the original, not a multiple)? Has the thesis changed or only the price? Does the invalidation level still stand — and does the total risk including all entries stay inside the per-idea cap? Four yeses is a tactic; any no is an escape attempt the account is funding.

Note what averaging down does not do even when disciplined: it does not improve the trade's original quality. It increases exposure to a thesis at better average prices — which is why it belongs to strategies that were built around scaling (some value and mean-reversion approaches) and remains out of place in breakout and momentum logic, where falling prices usually mean the thesis is failing, not getting cheaper.