When a trader purchases an asset, the asset’s price drops, and if the trader purchases more, it is referred to as averaging down.
It is called averaging down because the average cost of the asset or financial instrument has been lowered. Because of this, the point at which a trade can become profitable has also been lowered.
Whether it is a good idea to average down depends on the situation. If the particular asset’s price improves, then the original trade has been increased in profitability and your average entry price has decreased.
If the asset’s price then drops, however, the original trade’s loss has been increased further. For this reason, the subject of whether averaging down is a viable strategy is divisive among traders.
