So many trading strategies in forex to gain profit, including averaging trading strategy. This is actually very popular among traders. The averaging strategy needs to keep good money management. Because basically, this strategy is against market trends. The idea is that the market trend will not move in one direction, and it will go up or down.
In simple term, an averaging trading strategy by adding new orders when the previous order faces loss floating. How effective is averaging trading strategy? I will review it in this article.
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Averaging trading definition
The averaging trading definition is buying a trading asset at a lower price because the asset’s value is in a downtrend.
In a simple example in stocks trading. First, you buy a stock at $ 20, but after a few days, the stock price drops. Say the price is $ 15. The next step is you buy the same shares at that price, assuming that the value of the shares will rise again.
So when you buy the stock at $ 15, you previously held the stock when the price was $ 20. If you sell your first stock when the price drops to $ 15 you are losing $5. Then you buy a new stock when the price falls, if the price goes down again, say to $ 10, then you buy the same stock again at $ 10. If on the next days or week or months the price then rises again. It will eventually get a profit from all the shares that have been purchased.
Averaging trading strategy in forex
In forex, the mean Averaging strategy is the same concept. But what distinguishes forex compared to stocks, is that forex trading can be Buy or Sell. Different in stocks trading. You can only buy for the first time before selling.
How it works
Market trends in forex are known to be divided into uptrends and downtrends. This is a general classification, and there is a sideways trend market in particular.
The way averaging works in forex trading is when the first position is against the trend. The next step is the trader will open a new position in the same position referring to the first position. If then the price moves according to the trader’s position, the floating minus will immediately be covered by the profit after a reversal in the market trend.
Averaging in intraday trading
An averaging trading strategy can actually be applied to all trading styles, both scalping, intraday trading, swing trading and position trading. How to use trading averaging in each style that differentiates the amount of capital. Because averaging will add new positions by using an availability of free margin.
If the capital amount is very low, maybe when the market trends against all trader’s positions, it can quickly lead to account margin calls.
How to trade averaging in intraday trading?
Intraday trading is a trading style where traders will open and close positions on the same day. How to use an averaging trading strategy for intraday trading, there are some things that need attention are as follows:
- Calculates the average daily price movement. Take the total daily moving average. Hence traders can do averaging in just two steps. This can also avoid over-trading.
- Find major trend references in the long term. This is to adjust the trading position, for example, a bullish trend, the first position is Buy.
- Calculate your position size. It based on your risk management and total capital. Lower risk if you use the lowest position size, for example, 0.01 lot.
- Do the averaging level for just two steps taking the daily average distance to the first position.
- Put the stop loss at the maximum risk limit in the day trading that affords to bear.
- The first target to reach is the break event point, if all positions provide profit and loss with a zero or positive value of a few pips, you can close all orders and start over.
Averaging down trading strategy
Averaging Down strategy is a trading strategy by making purchases gradually when the price of a pair on the spot market is in decline. The advantage of this strategy is that your investment value will not drop too deeply like the market conditions at that time, because the investment value is offset by the increase in the amount of investment when the price is low.
Thus, if the price increases, it will get a higher gain from all trading positions.
How does averaging down strategy works?
Averaging down strategy is the art of trading both in forex, crypto, stocks and other financial instruments when price conditions are downtrend and traders will always go Buys.
This is an aggressive strategy as it will add to long positions when the price drops lower. The trade position size does not change in the averaging strategy. For example, the early position uses 1 lot, then the second position is also 1 lot. The third position remains 1 lot and goes on.
Suppose the price on the second-order then rises, then the trader has opened 2 lots so that he will be able to recover the floating loss position. But unfortunately, prices cannot be predicted accurately at all times. If the downtrend continues, the 2 lots position will also cause the floating loss to increase rapidly.
Capital calculations are a concern for traders with averaging. In the third position after the price falls, if the price starts to move up, it is possible that profit will be obtained.
Check out the image below
The chart above is an example of trading with an averaging down strategy. We can see that the position taken by a trader is only Long aka Buy. So there is no short position aka Sell when implementing the averaging down strategy.
How to trade? After the first long position turns out then the price goes down, the trader will add to the second long position as well. What is the distance between the first and second positions depends on the trader himself.
Some use the moving average indicator to determine the second position and so on. Others rely solely on candlestick patterns as position signals.
Capital account for averaging down trading strategy
An identical trading strategy relies on the strength of the account margin. The higher the amount of capital in the account, ideally the more durable it is so that it doesn’t get hit by the margin call level quickly.
In this case, choosing the account type will greatly affect the amount of capital adequacy. Micro cent accounts, ideally, have a stronger margin level than standard accounts using the same funds.
Averaging up a trading strategy
Averaging up trading strategy supposed as better than averaging down. The underlying assumption that a trader opens a long position is when the price is at the lowest level. However, determining the lowest level of a price is often ambiguous. Because according to the indicator the price has reached its lowest level, but in fact, the price might is still going down.
Averaging up trading strategy is a trader opens a Long position, aka Buy when he thinks the price trend will go up, but what happens is the opposite the price continues to fall.
This condition forces the order position to face negative floating. Then with the next signal as a trigger or taking into account, the average distance trade opens a new Long position in step two averaging.
Averaging up a trading chart
The image above as example average up with two-step averaging. In the first position, the trader will look for the lowest point of the price level based on support and resistance.
In simple theory, when the price is already low it will be possible to go up again. However, because what happened was that the price fell, traders would look for the next low to take a second long position.
In the example above, it happened that after the second position opened then the price moved up again in the direction of the target.
Stop loss and target profit
However it is unlikely that the strategy will work perfectly, sometimes there are failures due to market volatility. Therefore, using this strategy is important to calculate the limit risk in an averaging plan.
An important concern for stop loss is to look for levels that are closest but the potential is not touched is rare.
There is a way to place a stop loss by choosing the same price in both positions. Or it is possible to place stop losses at a different price. So that if one order hits a stop loss, there is still a possibility that another order will still be open.
While the profit target can also be based on the appearance of a reversal signal, by reading the candle formation.
Averaging down, swing trading
Implementing averaging down strategy in swing trading is still possible in forex trading. Choosing a timeframe for calculating the averaging step distance is important because it relates to the total capital in the trading account.
Swing trading usually chooses a daily timeframe to calculate step averaging. You have to calculate the value per pip against the USD to calculate your total capital. So that the averaging step can still open new positions.
Assuming you are trading 0.01 lot and the value per pip is 10 cents, then you have to calculate the distance of the second position to match your total margin.
Averaging up, swing trading
Average up swing trading is essentially the same as average up in general. This a trader will look for when the price is considered to be at a low level to open a long position.
If then the price rises, the trader does not need to open a new position, so if the target is reached, then the trader will start again from step one But if the price then continues to fall, the second scenario is like the averaging strategy plan by calculating the step two distance to open a long position.
If the price after the second position continues to fall, step three can be done by looking at the account level margin, this is only to anticipate that if the margin level is too low, the possibility of reaching a margin call will occur sooner.
Advantage averaging trading strategy
- The advantage of averaging the trading strategy is when the major trend is bullish. If at the lowest point then the price has a trend reversal. The profit earned will be maximized from all active Long positions.
- This strategy is also simple. All you need is to calculate the distance averaging step based on risk management.
- This strategy can be used for all trading styles from scalping to position trading. But the best results are with averaging swing trading.
Disadvantage averaging trading strategy
- This is an extreme strategy, it can put a trading account in danger if at all averaging steps you are always dealing with losses.
- Not all traders are suitable and able to hold their emotions, especially when facing high floating losses.
- An averaging trading strategy requires more capital capable to run all averaging steps properly.
Is averaging trading strategy profitable?
Whatever the result will depend on market analysis skills, this strategy requires patience and discipline. However, this strategy is quite effective for trending market conditions, but it will be difficult in sideways conditions as most of the strategies do not work on a sideways market.
Averaging down which is aggressive trading is quite a drain on the strength of the margin level. So it’s better to use the second method with averaging up.
To better understand how it works, take advantage of the demo account because the demo account reflects the real market only with virtual money.
Strategy in forex is the art of capturing profit opportunities during the market trend session. An averaging trading strategy is one of the extreme strategies, which requires good handling. Strong psychology. This forms the discipline of trading.
Note, this is only an educational tool and not investment advice, because forex trading is a high-risk business.
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