RM Mechanics #3 — Cost Averaging vs. Buying the Dip (They're Not the Same)

Both involve buying more when price goes down. The logic behind them is completely different — and mixing them up is one of the quieter ways traders turn a manageable loss into a serious one.

Cost averaging means you planned from the start to build a position across multiple entries. You decide your total position size upfront, split it into tranches, and stick to that structure. Whether the asset goes up or down between entries doesn't change the plan — you defined it before you were emotionally involved in the trade.

Buying the dip usually means you're already in a position, it's gone against you, and you buy more to lower your average entry. This sounds logical but often isn't — because the reason the price dropped might be exactly the reason you shouldn't be adding exposure.

The question to ask yourself honestly: did you plan to have multiple entries before you opened the first position, or did you decide to add after you were already in the red?

Rule: If you're going to use cost averaging, decide the full structure before you place your first entry. Never add to a losing position you didn't plan to add to.

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