Averaging trading strategy for

Averaging is a work strategy when you either made a mistake or just made any deal (the first one that came to your mind), the price went against you, and you make the same type of operation at a more favorable price.

All prices are in conventional values, so do not be alarmed - it's just a mathematical example to show the principle of the averaging strategy.

Example of an averaging strategy

For example, you bought $1 million against the pound at 1.5500, expecting to sell at a price above 1. 5510 and earn 10 points profit (1.5510 - 1.5500). But after a short period of time the price went down to 1.5480, so you suffered a 20 pip loss (1.5480 - 1.5500).

You decide to buy another $1 million. pound at this rate of 1.5480, expecting to sell $2 million at 1.5495 and earn the same 10 points of profit (1. 5495 - 1.5500 + 1.5495 - 1.5480).

In doing so, you have produced averaging two positions at the average rate of 1.5490 ((1.5500 + 1.5480) / 2) and you do not need to wait for the price to rise to 1. 5510.

Disadvantage of the averaging strategy

The main disadvantage of averaging is the fact that you do not know in advance to what price the market will go against you. And the fact is that averaging requires each time (after the first time) to invest twice the previous amount of bail money.

But if you have a lot of money, you can afford moves of 100, 200 or more pips. Although such market moves are infrequent, it's still the best strategy, especially if you see that you've misjudged the direction of the trend.

Example of an averaging strategy

Let's try to show it on the example already given above. Suppose when the price reached 1.5495, we saw that we were wrong and we could buy the dollar against the pound cheaper. At this moment, you closed your position and let the rate already fall to 1.5490, thus we suffered a loss of 10 pips (1.5490 - 1.5500).

Then the price fell to 1.5480 and we bought $2 million against the pound (bringing the total deal to the same amount as in the example above) at that price. When course At 1.5495 we sold 2 million and made 30 pips profit (1.5495 - 1.5480 + 1.5495 - 1.5485).

The total result of the transaction was 20 points profit (30 - 10), which is 10 points more profitable than the similar in all its characteristics of the previous transaction with averaging. In doing so, we have also freed ourselves from the fear of a stronger and unexpected change in course, our position is stronger by at least 10 points.