Dollar cost averaging, price by price

Two different things with the same name

Time-based averaging buys a fixed amount on a schedule — $500 every Monday — regardless of price. It is a savings habit, and a good one, because it removes the decision from a decision you are bad at making.

Price-based averaging splits one intended position into rungs at progressively lower prices: a third at the level, a third 5% lower, a third 10% lower. It is a trading tool, and it fits a level-based entry naturally, because the whole premise of the entry is that price may overshoot the floor before turning.

Why a resting ladder is the clean way to do it

Every rung goes into the market as a good-till-cancelled limit order the moment you decide, so each fills only if its price is reached and no software has to act on your behalf later. You keep a lower average cost when the overshoot happens, and you still own the stock — in size — when it does not. The trade-off is real: resting buys tie up buying power until they fill or you cancel them.

On this site, ticking "average in" on a trade splits the shares across two to five rungs at a spacing you choose, shows every rung with the total outlay and the resulting average cost if they all fill, and places them on one confirmation.

The two ways it goes wrong

• Averaging into a broken position. Adding to something that has lost its trend is not averaging in, it is increasing a bet you have already been told is failing. Ladders belong under a level, with an exit below the bottom rung.
• Forgetting the stop moved. A stop set for the top rung will be far too close once you own the lower ones. Set it below the lowest rung and size the whole ladder as one position.

Where the levels come from: when to buy a stock.

Read next

• When to buy a stock, based on the chart
• Stop loss and take profit, placed before you buy
• A swing trading strategy you can state in five lines
• All guides

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