Never average down. When a stock falls significantly below your purchase price, it is foolish to buy more. The stock is clearly not behaving the way you anticipated. Strangely enough, many investors will sell a winning position to lock in a profit because they are afraid the stock will decline and that profit will evaporate. Instead of selling, they should let the stock run as long as it "wants" to and sell only if they get a sell signal.
They will not sell a stock that has declined because that would lock in the loss. People do not like to admit that they were wrong about a choice once they have made it. Therefore, rather than conclude that they made a bad choice, they convince themselves that the choice was right and that since the stock has declined it is a better deal now than it was originally. In a state of denial, they buy more of the stock that declined.
If the investor bought right at the line of support, the stock should have risen rather than decline. Expert traders often buy at a line of support because that helps them minimize risk. If the stock falls to a close only 3% below that line of support, the experienced trader knows something is wrong and can sell with minimal loss. However, the amateur denies he made a mistake and buys more. If the stock declines, that is certainly not a buy signal, it is a sell signal. The stock was bought on a certain premise. If that premise proves to be wrong, there is no longer a valid reason for maintaining the position.
If you get a margin call, you have obviously been in the stock too long. A margin call occurs when the stock has had a significant decline. If your reasoning was sound when you purchased, that should not happen. Never meet a margin call. Why throw good money after bad? Save your cash for something that looks more promising rather than put it into something that has already started to fail.
It is far better to buy more as a stock rises (average up), because it is behaving the way you anticipated. In other words, average up rather than average down. The fact that a stock is moving in the right direction after its purchase is evidence that the thinking behind that purchase was sound. It is an indication that the right decision was made. A stock that has already started to rise above its support, presents far less risk than a stock that already started to decline below its support.
