Dangers of Averaging Down Your Positions

One of the most common practices that investors and traders is average down. In simple terms it makes sense but some of the logical and obvious points are always ignored. Here are Dangers of Averaging Down Your Positions.

People who average down by adding at lower prices have following issues:

1. If their previous buys were at high prices then they will have to spend a lot more money to be able to bring their average to a break even level

2. You do not know when the market has bottomed out. What if you bought more at a low price to average down but then market falls further. Now you will have to buy even more. There is no end to it. Every time market falls further, you will have to spend more and more money to bring your average to break even.

3. By buying too many shares in the rush to average down, you are increasing your market risk exposure. That means if the company goes bust, you will be seriously out of pocket; much more than you previously were before you started averaging down.

4. If there is a heavy placement of new shares at low prices, it may dilute the stock value. The share price in that case may never return to its highest highs leaving investors/traders in losses for good.

It is all simple logic and maths. Take care.

Happy Trading

Remember: It is war there, plan it or lose it.

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