Averaging down is buying more of a security an investor has already bought at a higher price. Because of the unit cost averaging effect, averaging down leads to an average price closer to the current (lower) price rather than the original (higher) price. The effect of this is that it greatly improves the chances that the holding of the security in question will be profitable. However, it does this by diluting the impact of the original holding. It cannot actually create gains where there were none. It obscures the loss made so far by mixing it in with new purchases that will, hopefully, be bought cheap enough to make gains. Averaging down is an approach that makes an interesting contrast to stop loss sales.
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