Double Down Trading Strategy

The double-down trading strategy involves adding to a losing position by purchasing an equal amount of cryptocurrency as prices fall, aiming to lower your average entry and break even with a modest rebound. This approach can offer a path to recovery, but it also comes with significant risks if the market continues to decline.

TLDR Double down trading means adding the same amount to a losing crypto position to lower your average entry price, hoping for a price rebound to break even. While it can work in mean reversion markets, it's risky if prices keep falling and should only be used with disciplined risk management and a clear trading strategy.

When you find yourself holding a losing cryptocurrency position, you have a few choices: you can close the trade at a loss and look for better opportunities, hodl on in hopes that the price will eventually rebound, or consider employing the double-down strategy. So, what exactly does this strategy involve?

The double-down trading strategy means adding another position to a losing trade in the expectation that a price reversal will help you recover your losses. Essentially, you double your position when the cryptocurrency's price falls, which can improve your average entry price.

Understanding the Double-Down Trading Strategy

When you're holding a losing long position, the double-down strategy means buying the same number of coins as your initial position as the market moves against you, with the aim of breaking even if the price recovers by just half of the decline.

Consider an example for clarity:

Suppose you purchased 100 Litecoins at $136, and then the price drops by $36 to $100. Facing an unacceptable loss, you might hesitate to close your position. Instead, you could decide to double down by buying another 100 Litecoins.

If the crypto then reverses and appreciates by $18 (half of the decline), you would reach breakeven. This happens because the loss on the initial 100 Litcoins to $18 while the second 100 Litecoins gain $18.

However, it's important to note that the crypto may continue to decline even after you double down. In this strategy, you're effectively adding to a losing position in hopes that the crypto will eventually recover.

Evaluating the Rationality of the Double Down Strategy

The issue with a double down trading strategy is that it often focuses on the price rather than on the odds of success. In trading, you need to concentrate on the process and the likelihood of success. The market doesn’t consider your average price—it moves on its own.

This average price can become an anchoring bias that skews your judgment. Is double down a part of your overall strategy? Keep that question in mind.

This strategy shares some similarities with a scale-in approach. For example, if you’re buying Litecoin, you might not invest all your capital on the initial purchase, keeping additional funds available if the price drops further. However, while a scale-in strategy is a planned course of action, a double down strategy usually isn’t.

Comparing the Double Down and Martingale Strategies

While you might notice similarities between the double down trading strategy and the Martingale strategy, they are distinct approaches. With a double down strategy, you add the same position size as your initial losing position.

In contrast, the Martingale strategy involves increasing your trade size—doubling the initial position—after each loss. This means the Martingale strategy significantly increases your risk compared to the double down approach.

Distinguishing the Double Down and Repair Strategies

The double down and repair strategies are not the same, even though both aim to help you break even faster. With the repair strategy, you use call options to mend a losing position—you buy one call option and sell two call options for every 100 coins you own.

The premium from selling the two call options covers the cost of the one call option, effectively giving you a “free” option position that accelerates your breakeven process.

Double Down Strategy and Mean Reversion Strategies

Mean reversion strategies work like a rubber band—if the price strays too far above or below its “normal” level, it tends to move back to the average. This characteristic can make a double down trading strategy effective. For more details, refer to our section on double down trading strategies.

Double Down and Trend Following Strategies

Trend-following strategies operate differently from mean reversion approaches. In this case, a double down strategy may not be as effective. For a deeper understanding, check out our further discussion on double down trading strategies.

Risks of the Double-Down Trading Strategy

The double-down strategy carries inherent risks, particularly if the market continues to decline after you implement it. You need to be cautious about potential losses and ensure you have robust risk management strategies in place.

Often, doubling down isn't part of a well-considered trading plan but is driven by trading biases. A solid trading plan should emphasize overall strategy, proper risk management, and the likelihood of success.

Bottom Line

The double down trading strategy can offer a pathway to breakeven by averaging down your entry price, particularly in mean reversion scenarios. However, its success hinges on disciplined risk management and a well-thought-out trading plan rather than reacting emotionally to market declines.

While it may serve as an alternative to closing a losing position or as part of a scale-in strategy, the inherent risks—especially if the market continues to decline—mean that this approach should be used cautiously and only when it fits within your overall trading strategy.