If the price was not moving in favor of your trade after you doubled your position, say it moved the other way at the same magnitude. You will lose a lot. Do a simple math here. Assume you bought 1000 shares of XYZ, then it dropped $1, you lose was $4000.0. Then doubled the position. Now you had 8000 shares. If it went up $0.875. You made profit of 3K. However, if it went down the same amount (Please do not tell me it is impossible. It can happen that way. Believe me.) And then you lose was enlarged to $11,000.00. It will hurt you hard. Yes, many are addicted to average down. I also get the same problem. Yesterday, I was hit once in two month again doing average down when I bought MEOH. Lost huge. Big lessens.
I think its extremey addictive because most of the time IT WORKS due to the volatility of the market. However, when it does not, OUCH!
The risk of engaging in your "addictive" activity is that one day you will likely overdose. Oddly enough, most people who actually overdose probably didn't expect that they would.
You will get blown out, plain and simple. That's what happens to almost everyone, it's inevitable. It will work for periods of time, one that we may be entering now. But once it stops, you're f**ked.
That's OK as long as Mr Market's got his Jimmy cap on Nothing wrong with averaging down if it's part of your plan. But do you remember who said this? <b>"Everyone has a plan until they've been hit."</b>
agreed with Leon. Adding to a losing position going against can be very effective provided it is within the construct of an overall strategy or style, not just as a spur of the moment "oh sh*t, I'm down a point, better double down.". As for a stoploss, mine is the closing bell..it seems to work just fine. That said you will have days..or weeks..of a trending market (such as the last couple weeks) where you get crushed..repeatedly. As long as you are aware of this and can ride these periods out in the long run you'll be ok.
it works. I set limits on total position size, and size of each additional purchase. and max purchase. in addition, I recalculate my estimate of forward expectation, and lighten or add based on this. If u use this strategy, the danger is becoming over-extended in one position, or in one position too long. U have to manage your capital and now worry about where u got in, but making best decision in each moment, be it add or subtract position size. Some say to risky but.. secret is u can't make any $$ without risk in this game.