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Risk & Money Management

Why Averaging Down Is Dangerous

Averaging down is adding to a losing position at lower prices; the average price falls, which looks better, and the size grows, which makes every further pip of the fall cost more. This paper shows you three pieces of 0.10 lot on the euro against the dollar on 28 July 2025, bought at 1.17166, 1.16916 and 1.16666 on a day that fell to 1.15852 and lower the next day, 319.20 dollars under at the low against 131.40 for the first piece alone; the idea as a snowball rolling downhill; the lines on the fifteen-minute chart; the bill for each further ten pips, 10, 20, 30; and the Trade tab at the low, with three rows, three losses and three times the margin.

Difficulty
Intermediate
Reading time
5 min
Pages
8
Reviewed by
Saman Rahbar

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Three pieces on a falling day

Averaging down is adding to a position that is losing, at prices lower than the first. Take the euro against the dollar on 28 July 2025, 0.10 lot bought at 1.17166, the 10:00 close. The price fell. A second 0.10 was added at 1.16916, first traded at 10:30, and a third at 1.16666, first traded at 12:30, example adds 25 pips apart. The average price fell to 1.16916 and the size grew to 0.30 lot. The day's low was 1.15852 at 23:45; there the first piece was 131.4 pips under and the three together 319.2, which is 319.20 dollars against 131.40 for the first piece alone. The next day went lower still.

A snowball rolling downhill

Picture a snowball rolling downhill. Every turn picks up more snow, so it is heavier at the bottom than at the top, and the further it goes the faster it grows. A position that is added to as the price falls is that snowball. The slope is the falling price; each add is another turn and another layer, 0.10 lot to 0.20 to 0.30; and the weight is what every further pip down now costs. The average price falling is the part that is easy to see and easy to like. The size growing is the part that decides what the next hundred pips cost, and that is the part the snowball is about.

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