You need to look at pattern. The pattern on the chart is a bear flag, which is a steep drop followed by consolidation in a sideways manner which indicates further downside. It's evident on both the daily and weekly chart.
Furthermore, the price is trading below all the moving averages which are all in downtrend. This stock could go below a dollar based on the pattern and the downtrend.
This is not a good stock to be averaging down. You only average down if you have a major support level in mind and you still have a stop loss. So if stock is at 10 and you have a major support at 8 and then another at 6 with a stop out on a close below 4, that's fine to scale in.
But you can't just say you are going to keep averaging down without any stop out otherwise you will average down all the way until zero.
The key thing though is you have to have position limits and they have to be defined prior to entering the trade. The most I will risk on a large cap swing trade is 10% of my account, and on a small cap swing trade it will be maximum 5% of my account.
This is hard for the little guy who doesn't even have 5,000 but you need to have limits. The easy way of doing it is to do 10% max swing position with a maximum 10% loss. If you are going to take a very risky small cap position, make it 5% with a 20% max loss. If you are going to swing for some penny crap, honestly you should do that in a separate account but if it's all in one account then make it 2.5% with 40% max loss.
So, when you enter a position and want to say do the example mentioned earlier you would buy your first half position at 8 bucks and then leave a limit order GTC for 6 bucks, and a stop loss to exit full position at 4 bucks. I'm just using that as a rough guidline.
For dicey short positions you best go 1/2 position at a time as I have gotten creamed on short squeezes going full position. It's also important when picking off a low in a stock. You have entry 1, entry 2, and then bam you have your downside exit locked in and your upside target on watch.
This is risk management and it's actually a hell of a lot more important than picking stocks, picking patterns, having awesome research etc.
You can have a sub 500 win loss ratio but if you are awesome at risk management you can become a millionaire. On the flip side you can have a 90% win loss ratio but if your loser wipes out your winners all in one trade and takes down your account then you just f'd up and are in the poor house.
