Your position is underwater and you're thinking about averaging down. Should I buy more to lower my cost basis? That impulse feels logical but it's often sunk cost fallacy in disguise. Throwing good money after bad because you can't accept the loss is how traders go from down 20% to down 80%. Before you ape more capital into a losing trade, audit whether strategy or copium is driving this decision. Cut my losses or buy the dip — make sure you know which one you're actually doing.
Checking this trade...
Or write the trade on your mind:
Checking this trade...
Related decision moments:
Averaging down can be a valid strategy — if it was part of your plan before the trade went red. If you are deciding now because you cannot accept the loss, that is sunk cost fallacy, not strategy.
Sunk cost fallacy makes you invest more into a losing position because you have already put money in. "I have already lost so much, I might as well buy more" is the classic trap. It usually makes losses worse.
Stop adding when you have no predefined plan for the entry. If your reason for buying more is "it has to go back up" rather than a specific thesis, you are trading on hope — not strategy.
It works when the asset recovers. It destroys portfolios when the asset keeps falling or goes to zero. The problem is you cannot know which will happen. Averaging down without a plan is just increasing your exposure to a losing bet.
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