For example, if shares bought at 1,000 fall to 800 and you buy more at that price, your average purchase price moves to somewhere between 1,000 and 800. If the price later rises above that average, you may be able to work off the unrealized loss sooner than if you had only held the original purchase.
Risks and points to keep in mind
Unless the price rebounds, averaging down carries the risk that the additional purchases actually increase the total loss (number of shares held multiplied by the decline). If you keep putting in money while the price keeps falling, the eventual loss can end up larger than it would have been originally. In particular, an approach that mechanically buys more every time the price falls — sometimes called a martingale-style averaging strategy — carries the risk of rapidly expanding losses when it is used without a clear money-management rationale, so caution is warranted. Dollar-cost averaging, which buys a fixed amount at regular intervals regardless of the price level, is based on a different idea from averaging down, which adds to a position specifically after a decline.