Hey everyone,
I hope you all had a wonderful holiday.
Today, I’d like to talk about a traditional trading idea that’s been around for a long time…
It’s called averaging down and it’s been touted as a smart strategy for as long as I can remember. It’s very old school.
Here’s how it works:
Say you buy a stock at $10, but it drops to $8. Instead of cutting your losses, you decide to buy more at $8.
Now, your average cost basis drops to $9. The theory is that if the stock bounces back, you’ll hit breakeven sooner—when it gets to $9.01 instead of $10.01.
On paper, this might sound like a smart move…
But in reality, I think it’s one of the worst habits you can develop, especially if you’re trading volatile, low-priced stocks like we like to trade here at StocksToTrade.
I’ll tell you why I think it’s a mistake and why I believe it’s a strategy you should avoid.
Why Averaging Down Rarely Works
Here’s the harsh truth about momentum stocks, and I say this all the time: These stocks are volatile, and when they start to move away from you, they rarely recover.
To be clear, the morning fader setup is a different story. When low float, volatile stocks exhibit this pattern, and it works out in our favor, they do come back and reward us with big gains.
Read more about the morning fader in my recent article.
And I’m also not talking about “real” stocks like Apple Inc. (NASDAQ: AAPL) or Amazon.com (NASDAQ: AMZN).
I’m referring to fast movers, like pennies and $10 and under stocks that spike, fail, and fade into oblivion.
When you average down on a loser, what you’re really doing is refusing to admit you’re wrong.
Instead of cutting your losses and moving on, a practice I preach every day, you’re praying the stock will recover someday.
That’s a loser’s mentality, and it’s why 90% of traders fail. You see, the market doesn’t care about your hope. Hope is not a strategy.
The Winner’s Mentality
Successful traders add to their winning trades, not to their losers, even if that means raising their cost basis.
If you’re in a stock that’s breaking out on news or some other catalyst that’s creating real momentum, you’re riding a trend.
The stock goes from $2 to $3, you buy at $3, it hits $4—then you add to your position. And yes, it’s at a higher price…
But you’re doubling down on a winner, not betting more capital on a failing trade.
Compare that to averaging down…
Most of the time, the stock keeps dropping, and you end up holding the bag. You’re stuck, and you’re burning cash.
And yes, you might get lucky once in a while. Maybe you average down, and the company gets acquired, and you break even—or even make a profit.
Remember, though, that’s luck, not a repeatable strategy. And around here, we’re looking for repeatable, reliable, and high-probability setups.
Wrapping It Up…
If you want to succeed in trading over the long term, you need to develop a winner’s mindset. That means:
- Cut your losers quickly.
- Let your winners run.
- Add to winners, not losers.
It’s that simple.
I get it, losses are tough to deal with at first, and it might sting a little…
But taking a small loss, saving your capital, and moving on to a more promising opportunity is much better than hoping for a miracle that never comes.
Every morning before the market opens, I go through patterns I’m seeing, strategies and trading mindsets like the one above, and more to get you ready for the day ahead.
If you’re not already tuning in to my Premarket Prep, it’s part of my Daily Income Trader System.
Check out my Daily Income Trader System here.
Until next time,
Tim Bohen
Lead Trainer, StocksToTrade