Averaging down is an investment strategy where there are increased buys more of an asset after the price has dropped. The reason to do this is to add more of a particular stock to your portfolio that you already hold. It is called averaging down because you hold more of a stock that with low value, so the overall value is lower.
While this may seem counter-intuitive, there is a rationale for averaging down. Averaging down is similar to buying in the dip, but then the idea is to hold on to more of the asset. For example, if you have 40 shares of an asset that is worth $10, then it drops to $5 you might buy 40 more shares. Now you have 80 shares each worth $5, and so the overall value is lower.
However, you bought those shares because you are optimistic about the asset and have good reason to believe it will recover. So, if your $5 stock is up to $15, you have made a solid profit.
When to buy low
The reason to average down is to acquire more of an asset you have good reason to believe will recover. This strategy can be applied to any asset: cryptocurrencies, fiat currencies, or precious metals.
The idea is that you believe that the asset is valuable in the long-term, and so holding more of it over a longer period of time will end up turning into more value. And if the asset does recover, and continues to perform well, then your assets are worth more over the long hall, and you bought them at a low price.
This is a classic strategy of buying low. But there is a caveat, of course.
Proceed with caution
Averaging down is typically used on an asset that the investor has a lot of faith in, or is heavily invested in. Unfortunately, having faith in stock or holding a lot of it does not ensure its value over time.
Why is that? Well, it could just be that you have a cognitive bias, and so you are overly optimistic. Naturally, you want your holdings to perform well, and that is not always the case. So if you buy more of a dropping stock, you may average down, and never see the asset recover its value.
When not to HODL
This is not a short-term investment strategy, averaging down is an investment strategy for those who plan on holding.
Short-term traders are making money on a quick turnover, and so they would really only buy low if the investor had a good idea that they could make a quick turnover; which is not averaging down. For short-term traders, small losses can become large losses very quickly.
Typically, if a stock that you are invested in drops a little, the instinct is to buy more and hold on to your shares. This is a good rule if there is no particular reason for this drop. That is if the economy as a whole is doing ok, or your asset typically performs well against similar projects.
This is just as true for traditional assets as when investing in cryptocurrencies. In these past chilly months of 2019, the market has cooled, and it has been a bit of a bloodbath. But these are minor dips, and BTC and ETH have already started to climb back up.
It is the other smaller or newer projects that might be harder to test and give reason to pause when it comes to your averaging down strategy.
If your coins are not performing against the others, then that means it is time to look under the hood and see what is going on. Maybe they have something in the works, and there is a reason for the dip. But maybe it is time to move on and put your money elsewhere.
How to know if you should buy when your coins are down
But don’t stop there, make sure you build a full picture of what kind of work your projects are doing. If the whole market has taken a hit, then it is not time to panic or give in to FOMO, this may be your sign to average down. Pick up some more of your faves and wait for things to return to normal.
When deciding what your next move is, check in with your trusted social traders. This is exactly what your HedgeTrade platform is for. Hit up some of your top traders and find out what they are doing with their coins.
The make-up or break-up checklist
- Are your altcoins keeping you up-to-date with communications? What is there next move? What might explain a drop in value?
- Are you waiting on a milestone, maybe they are in beta testing, or they have a new crypto wallet arriving, or they are improving security issues? If there is real work being done, then those behind the project have nothing to hide and want to keep you in the know.
- Get to know other investors through social trading, with Reddit, Twitter and the like. Take the drama queens with a grain of salt, but you may find some useful details.
Wrap up on averaging down
- Averaging down means increasing your holdings when one of your investments take a drop in price.
- This strategy is typically used for long-term investments and is not your best strategy for short-term success.
- The strategy is to buy more of a dropping asset, so be sure you have a sense of why that is and have good reason to think it will recover. Don’t rely on a hope and a prayer, do your research.
- Is everyone in a bit a decline or is it just your asset? If it happening to everyone then there is a good chance things will pick up again. But if it is just your asset then you better think twice before doubling down.
- Averaging down is taking a risk, remember it is one of many strategies out there.