Averaging in Trading
Hello, dear readers of the Doughvest blog! In this article, I want to consider such a concept in the Forex market as “averaging” in trading. What is the averaging? Is it good or bad? Before we continue make sure you have created an account with one of the Top Forex Brokers. Today, we will be using the broker Libertex
Averaging in trading is the opening of a similar transaction on the account when there is already at least one unprofitable one. That is, a new deal is opened in the same direction as the first one, but at the same time, there is a minus on the first one.
Forex averaging is one of the most common trading methods for traders, especially beginners.
Averaging is used in large quantities by novice traders who do not have a clear system (if there is no system, I repeat, you switched to a real account early).
Psychologically, they are not yet mature and cannot bear losses. In other words, they want to run away from them, but it does not always work out. Uncle Kolya (margin call) catches up with them.
Let’s consider the options for averaging trading:
A trader with a deposit of $1,000 got into the bay on the EUR/USD pair with a lot of 0.1:
The first trade was opened at the level of 1.3007; the margin was $130.07. The trader expected the price to bounce.
But the dollar strengthened and the price went down, reaching an important level, and the trader thinks that the bears will not sell it, so he opens the second deal, with a lot of 0.1, at the level of 1.2886.
Meanwhile, the minus from the first trade was $121; the margin from the two open trades was $258.93.
What are the bears doing? They break the level, and the price rolls further down, but on the way, they again have a strong level. The trader opened the third deal with the same lot of 0.1 at the level of 1.2770.
The loss from the two deals was $232. The margin after opening the third deal was $386.63. There are 127 points of free play left before the margin call.
And here is the glory of heaven!!! The bulls caught on and bred the bears. All three trades are closed with a take profit at 1.3112. In total, the trader earned 673 points ($673), which corresponds to 67.3% of the deposit.
The trader can breathe easily because he avoided the margin call and got a good profit. But don’t you think he took a big risk?!
Let’s look at another option:
A trader having a deposit of $1000 stood in the bay at the level of 1.3768, for the EUR/USD pair with a lot of 0.1, as we can see the price continued to move downwards, the trader opens the second trade at the level of 1.3714, then the third at 1.3633 and the fourth at 1.3580.
See the table below, how much the loss increased from each level, where new deals were opened, how the margin increased, and how much free funds remained from the deposit.
The trader turned out to be a stubborn bull with us, hoping that the downward movement would end and an upward movement would begin from the levels where he once again made purchases.
As can be seen from the chart, the trader did not cut losses, did not set stop orders. As a result, a series of margin calls triggered, starting with the most losing trade.
Remember: if several trades are open, when a margin call is triggered, the first one is closed by the most unprofitable one.
After the third margin call, $136.2 remained free margin. If you close the fourth deal at a price of 1.3447, then the deposit amount will be $272.
The loss is more than 72%, which is $728. In fact, the deposit is merged. And if you do not close the deal and the price continues to fall, the deposit will be almost completely depleted.
In the first case, averaging helped the trader to take a good profit, but if the bears had pushed the price further, then depot draining was a matter of time. In the second case, all levels were pushed through without rollbacks.
Averaging is one of the quickest ways to drain a deposit, and if used in combination with a martingale (doubling the lot size of each subsequent transaction), you can instantly reset the deposit and run for half a liter of valerian.
Averaging in Forex trading is justified if trading is carried out along the trend, but even here you need to have a good margin of the deposit in order to sit out the largely expected drawdown, and when the trend changes, it’s a pity to cut losses, but what can you do? Otherwise, you will regret it even more.
I hope my article helped you deal with averaging, and you will draw the right conclusion for yourself whether to use this method or not. Join our Telegram channel for market updates
