Averaging Strategy on Forex Trading
Averaging Strategy on Forex Trading
Averaging forex trading strategies that bring in multiple profits can be used in your trading system. Forex trading using averaging strategy or also called cost-averaging is a trading business that when practicing in the market has only one direction. However, it is very necessary to repeatedly open positions to be able to get profit. The point is, if at the first time you enter the market you are in a long or buy position, the next position will also be the same as buy only . Vice versa. Even if there has been a minus floating , it will still be in a long position to make profit.
The aim of averaging strategy is to reduce losses when in a position that is opposite to the trend direction and also to maximize the level of profit when one-way positions with the trend. But averaging is also a strategy that is quite high risk because in practice it must be able to “fight the market”. So this strategy is not recommended for those of you who still have minimal funds.
Following are examples of applying forex trading averaging strategies:
Mr. George entered the forex market with a buy position of EUR / USD 0.01 lot at the price of 1.2545 and put take profit of 20 points at the price of 1.2565. Then the price experienced a decline which resulted in Mr. George having to buy another 0.01 lot at the price of 1.2525 and install take profit 1.2555. But then the price dropped again, then Mr. George did another buy for EUR / USD 0.01 lot at 1.2505, with the take profit of 1.2525. Until finally the price will rise and touch the first take profit 1.2535.
Position 1: Open position 1.2545, price close 1.2535 = USD -0.1
Position 2: Open position 1.2535, price close 1.2535 = USD 0.1
Position 3: Open position 1.2505, close (take profit) price 1.2536 = USD 03 (equal to 30 PIPS)
So, the total profit = -0.1 + 0.1 + 0.3 = $ 0.3
Remarks: 0.10 lots = $ 0.1 (Because using an account without a spread, so the spread is not counted)
After looking at the illustration above, then the question will arise whether using this strategy will always get profit?
The answer is depending on how you use the forex trading averaging strategy.Because the success or failure of a strategy will depend on the state of the market and the skill of the trader who uses it. Usually when using averaging strategies, there are traders who always use forex indicators, but there are also those who rely on bare hands. Traders without an individual broker or trader will usually do this strategy if they are sure about the price. But if it turns out that the guess is a bit off, the trader must add his position continuously.
Averaging strategies are often used by banks, so they only buy to get interest from swaps . Every day the bank will receive interest if there is a swap position, even though it has withheld enough minus value.
USING AVERAGING DOWN AND AVERAGING UP
In an averaging strategy, there are 2 things you can use:
- Using averaging down
Averaging down is a strategy that is quite aggressive, because investors may have to spend money continuously, without knowing where the currency will decline. So that investors must have discipline when making a purchase. Actually, this strategy is quite easy to follow if done only once or twice. But if prices continue to decline, investors will also be easily affected emotionally. So he must decide whether to continue using this technique or not. But in general conditions when the currency market is sideways or bullish, averaging down strategies can be quite effective. Because of these conditions, asset prices have been limited.
Tips when using averaging down, you should limit it to 3 times, after that you can stop doing it. If it turns out the price continues to fall, leave it alone. After arriving at the bottom point, you can do averaging up.
The reason why you have to limit yourself, because sometimes someone will really want to do averaging down continuously, even until the funds they have are used up. If indeed the funds that you have are unlimited, it is not a problem to use averaging down continuously. But if the funds are limited it is better for you to stop doing it.
- Using averaging up
Unlike previous techniques, averaging up is actually considered better because you just bought a currency when the price was low. So when the price goes down, you have to wait until you can buy at the lowest price. It’s just that the problem is how to determine the bottom price. Often missed, so the price has already rebounded . Not to mention when you predict wrongly, when you think the price will be redounded but it turns out it’s just a hoax so the value will decrease even more. Psychologically, it can be easier for investors to do averaging up than down. So when the currency market decreases, you still have cash and no need to sell the existing currency. So you can wait for the right time to buy the lowest price.
3 TECHNIQUES FOR FOREX AVERAGING TRADING STRATEGY DEVELOPMENT
There are 3 techniques developed by averaging strategies, including:
Pyramiding techniques are the opposite of cost-averaging . In cost-averaging , when 1 open position will be added if you experience a loss, so that in this technique an open position will be added every time you get profit or profit.Pyramiding techniques will be very effective when used in trending market conditions. But it is not effective if used in sideways market conditions.
The martingale technique is a more extreme technique than averaging. In this technique, when getting a loss is not just a new position that must be added but must also double the number of transactions. This technique is the opposite of pyramiding. If pyramiding will be very bad when used in sideways market conditions, in contrast to martingale that will be very good and effective to use in sideways market conditions.
- Anti martingale
The anti martingale technique is similar to pyramiding, but the number of transactions will always be multiplied every time there is profit or profit added.This technique will be very effective if used in trending market conditions.Slightly different from martingale, which has to double capital at a loss, in anti martingale you have to open a new position and rely on capital when you are profitable. That way the profit that can be achieved will be maximized.
When a trader has gotten the market saturation point, then this condition can be the right time to be utilized by using averaging strategy. The goal is to be able to get a large enough profit. However, every strategy of course will always have disadvantages. In averaging the disadvantages are from the price that is very unpredictable, so that there will be a lot of market sentiment that can move prices. Therefore, you should pay attention to how the market conditions when using averaging strategy.
Apart from this technique, the most important for successful trading is prioritizing risk management, because risk management is useful to minimize deep losses. And ideally risk management is not more than 5% of your capital. So use the volume lot setting that matches your risk profile in applying this technique. That’s a forex trading averaging strategy that you can learn, good luck!