One of my favorite trading books is Trend Following by Michael Covel. In that book Covel describes a hand written note hanging on the wall behind the desk of legendary trader Paul Tudor Jones. The note read, “Losers Average Losers.”
The note was a reminder to Jones not to add to a losing position. I have come to embrace this philosophy as my experience with averaging down has rarely led to profit and almost always had negative impacts on opportunity cost. I have found that when a trade goes against me, the best thing to do is to sell it for a small loss and move on to another idea. Adding to positions that are in a downtrend turn small losses into large losses. With trading, keeping the losses small is key to Risk Management and leads to survival and profitability.