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What it says
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Next: how far can price fall before margin runs out?
The calculator shows the average. Margin decides if you are still in the trade when the price turns.
What is included
- The calculator, with your own numbers
- The formula written out
- A worked example you can reproduce
- Where grid, martingale and DCA bots break the maths
Who it is for
- People running or testing a trading bot
- Anyone sizing a position or checking costs
- Readers learning how the numbers work
- Not advice, and not for placing trades
Key facts
- New average price = total cost of everything you hold / total units. Adding at a lower price pulls the average down.
- Averaging down raises the amount of money exposed to the same asset. It does not change whether the price recovers.
- The price needed to get back to even is lower than before, so recovery looks nearer. The floating loss on the larger position is also larger per dollar of move.
- When each add is larger than the last, averaging down becomes the same arithmetic as a martingale ladder.
- All example numbers on this page are made up. The calculator cannot tell you if the price will recover.
How the calculator works
Your average price is what you paid per unit, weighted by how many units you bought at each price. Adding units at a different price moves that weighted average.
New average price = total cost / total units
Rise needed = (new average / last add price - 1) x 100
Exposure multiple = total cost / original cost
The rise needed is measured from the price of the last add, which is the lowest price in the example. It is a distance, not a prediction that price will travel it.
A worked example
You hold 100 units with an average price of $50, a cost of $5,000. Price falls to $40 and you add 100 more units. Now you hold 200 units, cost $9,000, and the average is 9,000 / 200 = $45.00. To get back to even from $40 the price must rise 45 / 40 - 1 = 12.5 percent. Without the add, it would have had to rise 25 percent, from 40 to 50. That looks like an improvement. But the money exposed went from $5,000 to $9,000, which is 1.80 times. At $40 the floating loss is (40 - 45) x 200 = $1,000 on the new position.
What a bigger add does
Make the add 200 units at $40 instead of 100. The total cost is $13,000 for 300 units, the average is $43.33, and the rise needed from $40 is 8.3 percent. The exposure is now 2.60 times the start. Each larger add lowers the rise needed and raises the money at risk at the same time.
The table behind the curve
| Units added at $40 | New average | Rise needed from $40 | Exposure vs start |
|---|---|---|---|
| 0 | $50.00 | 25.0% | 1.00x |
| 100 | $45.00 | 12.5% | 1.80x |
| 200 | $43.33 | 8.3% | 2.60x |
| 400 | $42.00 | 5.0% | 4.20x |
Every row is (5,000 + 40 x added) / (100 + added), with exposure as the new cost over $5,000. A made-up position.
Where bots break the maths
- Averaging down is a ladder. A bot that buys more each time price falls is doing this calculation automatically, level after level. If each add is larger than the last it is a martingale, and the exposure column in the table grows faster than the average improves.
- The recovery target gets closer and the account gets thinner. The rise needed falls with each add, so the bot looks closer to breaking even. The margin used and the floating loss both rise. See margin call for what happens when the account runs out of room first.
- It cannot change the direction. If the price keeps falling the larger position loses faster. If it recovers, the larger position gains faster. The calculation is neutral. The risk is not.
- Costs repeat. Each add pays its own fee and spread, so the true average is a little higher than this page shows. Add a fee percentage to the add price to include it.
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FAQ
Frequently Asked Questions
Does averaging down reduce risk?
It lowers the average price, so the break-even is closer. It also raises the amount of money in the same asset, so a further fall costs more. Whether that is less risky depends on the account size, the margin and where the price goes next.
What is the difference between averaging down and DCA?
Averaging down is adding to a position after it has fallen, often with an add chosen by the loss. DCA is buying on a fixed schedule or fixed amount whatever the price. The arithmetic of the average is the same, the decision rule is different.
Why is the rise needed measured from the last add price?
Because that is where the most recent unit was bought and where the position sits in this example. Change the add price to see the rise from any other point.
Can I enter prices that go up?
Yes. Averaging up works with the same formula and moves the average above the old one. The rise needed shows 0 percent when the last price is above the new average.
Why does the page not say whether to add?
Because the calculator cannot know the future. It shows the arithmetic of an add, which is the same whether the price recovers or not.
Are the numbers on this page real?
Example numbers are made up to show how the maths works, and the page says so. A figure only counts as exact when the page says it was calculated on a stated date. Nothing you enter in a calculator leaves your browser.
Can I use this to decide whether to run a bot?
It can show whether a bot's numbers hold together and how much an account can lose. It cannot say what the market will do, and it is not advice. Use it to ask better questions, then read the terms of your own broker or exchange.
Is this financial advice?
No. It is a calculator and general education. It does not consider your situation, and its output is only as good as the numbers you enter.
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