So long term investors have gone back and forth on this for years. Should you buy into a stock or ETF and then continuously add to it no matter the direction? The idea is that you buy a certain amount every month and your average cost will move around as you buy some months at discounted prices, and some months at inflated prices. The thought is that you would get more excited when prices fall because you would feel like you are getting a discount. On the way up your average cost would be lagging behind and you would be happy with your account growing.

If you are a passive investor then I have no problem with this at all. To pick a solid company or a popular ETF and average in over time should be a wonderful experience and, if you are consistent then over time you should do just fine.

The people that get into trouble are the short term traders that are attempting to do the same thing in a shorter amount of time. What typically happens is they buy a stock they feel is on sale. Over a few days it drops lower than they anticipated and rather than admit defeat and take a loss they decide to add more and "average down". Usually, prices continue to head south even more than they decide to add more and more. Eventually the position is so large that they cannot handle the loss size and they exit for a very large loss.

This can happen, and does happen to day traders as well. The reason these types of traders should avoid this is that they are likely trading on margin. If this is the case then they have very little control of the outcome once a margin call is issued. Margin is great and a wonderful tool but if used incorrectly the brokerage firm will take over the trade for you and exit immediately.

So to wrap it up, long term, passive investors should definitely consider dollar cost averaging if they have a position they want to be in for the long haul. Short term and day traders should avoid averaging in at all cost.