In simple terms
Averaging a position means buying or selling more of the same instrument at a different price, thereby changing the position's average entry. In everyday trading language it often means adding to a losing position, or averaging down.
Average entry is weighted by quantity: one unit bought at 100 and another at 80 produce an average cost of 90.
What changes
The new purchase lowers average entry, but it also increases trade size, capital exposure, and potential loss if price keeps falling. At a current price of 80, the first unit's loss still exists; the second trade does not erase it.
A plan should specify the maximum number of additions, total size, invalidation, and aggregate risk. DCA, scaling in, and discretionary averaging are different procedures and should not share one label.
Limit
Lowering average entry does not automatically lower risk or improve the quality of the investment. Without a predefined cap, averaging can turn a small wrong position into a dominant exposure.
Sources
- CME Group, Proper Position Size — connects position size, stop level, and monetary risk.
- CME Group, Risk Management and Your Trade Plan — calls for limits on per-trade risk, exposure, and leverage.
- FINRA, The Pros and Cons of Dollar-Cost Averaging — defines scheduled DCA, distinguishing it from discretionary additions to a loss.