The market was a little bipolar yesterday but ended in the green.
As we slowly bounce back from this month’s pullback, we still have very low visibility, and what happens day to day is anyone’s guess.
That being said, we’ve got tons of day trade setups lined up each morning.
I go through each one during my Pre-Market Prep every day at 8:30 am Eastern.
Join me and see what you might be missing…
And speaking of day trading, today, I want to hit on a strategy that’s been used in that arena for what seems like forever.
It’s called averaging down. I’m sure you’ve heard of it.
Here’s the basic idea:
You buy a stock at $10. It drops to $8.
Instead of cutting the trade, you buy more at $8. Now your average cost basis is $9.
So if the stock bounces back to $9.01, you’re at breakeven instead of needing it to go all the way back to $10.
Sounds like a smart idea, right?
Well… not so fast.
This might look fine on paper, but in the real world, especially in the world of volatile, low-priced momentum stocks, averaging down is one of the worst habits a trader can develop.
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The Harsh Reality of Averaging Down
I say it all the time when it comes to day trading…
“We’re not trading ‘real stocks’ with strong fundamentals. We’re trading volatile momentum stocks.”
A lot of people who average down don’t realize that these types of stocks rarely bounce when they start to fade.
To be clear, there’s the Morning Fader pattern that we do look for. But that’s a very intentional pattern. It’s part of a proven, repeatable strategy.
I’m talking about fast-moving pennies or low-priced plays that spike on news, fail by 10 a.m., and fade into oblivion by lunch.
When you average down into one of those, what you’re really doing is refusing to admit you’re wrong.
You’re not following a process…you’re just hoping the stock will magically come back.
And what do I say about hope?
In case you forgot, hope is not a strategy.
The Market Doesn’t Care About Your Feelings
The market doesn’t care that you “believe” in a stock.
It doesn’t care that you think it’s “oversold.”
And it definitely doesn’t care that you want your money back.
If the stock is heading south, and you’re averaging down, you’re just digging yourself into a deeper hole.
And of course, every now and then, someone gets lucky. Maybe the company gets bought out. Maybe the stock squeezes.
But that’s just a lottery ticket, and we don’t survive the trading battlefield on luck.
Instead of Averaging Down, Do This
Here’s the shift you need to make, and this is what separates the 10% who make it from the 90% who don’t:
Winners add to winning trades. Losers add to losing trades.
It might sound harsh, but it’s that simple.
So what should you do if you’re in a stock that’s breaking out—strong catalyst, high volume, float rotation, all the boxes checked—and it goes from $2 per share to $3?
You add more shares at $3.
Stock hits $4? You add again at $4.
Yeah, your average cost basis is going up, but that’s not the point here…
With this method, you’re scaling into strength, not weakness.
When you average down on a failing trade, you’re just throwing good money after bad.
Good Money After Bad; TheVCFactory.com
Cut Your Losses Early and Live to Trade Another Day
I get it, taking a loss sucks. It can sting, especially if you’re new.
But what’s worse is holding and hoping, only to watch a 10% loss quickly slide into 30%, 50%, or more territory.
Do this instead:
- Cut your losers quickly
- Let your winners run
- Add to strength, not weakness
That’s how you survive and thrive in this business.
Your first step towards success is having a great trading platform that provides alerts so you know exactly when to add to your winners or cut your losses.
StocksToTrade is my top pick, and the one I use every single day.
It also features real-time data, charting, technical indicators and more.
And right now, you can get two weeks of both the STT platform and our Breaking News Chat service for $17.
Grab your 14-day StocksToTrade + Breaking News Chat trial today for only $17!
My Final Thoughts…
So the next time a trade goes against you, and you’re tempted to “buy more and lower your average,” stop yourself.
Ask instead:
“Am I following a repeatable strategy, or am I just hoping to get lucky?”
That mindset shift can change everything.
Trading isn’t about being right every time…
It’s about managing risk, staying disciplined, and living to trade the next day.
Looking for more advice like this?
And trade ideas?
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Have a great day, everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade