Averaging Up

Assume you pay $40/share for 100 shares of a stock that is on the upside. After you purchase the stock, its price keeps going up. You like the company and want to own more shares so you buy 100 additional shares at $50/share. In this example, you own 200 shares at an average cost of $45/share, an obviously greater price-per-share than the original 100 shares. Thus, you averaged up.

Averaging up works as long as the price keeps going up, so you can sell at a price greater than the average cost/share. To protect your profits you want to sell on the upside or shortly after prices have peaked. Obviously averaging up on the downside makes no sense.