Averaging down after losses doesn’t mean risk is lower
Trigger scenario: Suppose you use 100 USDT to buy 100 coins at 1.00. When the price drops to 0.60, you use another 100 USDT to buy about 166.67 coins. In total you hold about 266.67 coins, with total capital outlay of 200 USDT and an average price of about 0.75. To move from 0.60 back to the average price, the price only needs to rise 25%. Compared to the original requirement to return to 1.00—which is 66.67%—it looks much easier.
Wrong decision: You treat “a smaller required rebound to break even” as “safer.” When you place the additional buy, the original unrealized loss of 40 USDT is still there. The new 100 USDT is just used to buy more coins at 0.60. If it drops again to 0.50, after averaging down your position’s value will be about 133.33 USDT and your loss will be about 66.67 USDT. If you don’t add more, the position would be worth only 50 USDT and your loss would be 50 USDT. Even though the average price drops, the amount change caused by every further 0.10 drop in price goes from 10 USDT to about 26.67 USDT.
What to change: Before averaging down, calculate the break-even price separately, and also how much the position value changes when the price moves by 0.10. Then plug the invalidation price into “total quantity × price,” and compare it to the total capital outlay. If you haven’t set up the total amount, the invalidation price, and the added volatility correctly, don’t add. If your original plan already specified batch limits and the upper bounds, then this case doesn’t apply. During self-checking, do these three lines of calculations first, then decide.
Trigger scenario: Suppose you use 100 USDT to buy 100 coins at 1.00. When the price drops to 0.60, you use another 100 USDT to buy about 166.67 coins. In total you hold about 266.67 coins, with total capital outlay of 200 USDT and an average price of about 0.75. To move from 0.60 back to the average price, the price only needs to rise 25%. Compared to the original requirement to return to 1.00—which is 66.67%—it looks much easier.
Wrong decision: You treat “a smaller required rebound to break even” as “safer.” When you place the additional buy, the original unrealized loss of 40 USDT is still there. The new 100 USDT is just used to buy more coins at 0.60. If it drops again to 0.50, after averaging down your position’s value will be about 133.33 USDT and your loss will be about 66.67 USDT. If you don’t add more, the position would be worth only 50 USDT and your loss would be 50 USDT. Even though the average price drops, the amount change caused by every further 0.10 drop in price goes from 10 USDT to about 26.67 USDT.
What to change: Before averaging down, calculate the break-even price separately, and also how much the position value changes when the price moves by 0.10. Then plug the invalidation price into “total quantity × price,” and compare it to the total capital outlay. If you haven’t set up the total amount, the invalidation price, and the added volatility correctly, don’t add. If your original plan already specified batch limits and the upper bounds, then this case doesn’t apply. During self-checking, do these three lines of calculations first, then decide.