In forex trading, averaging is a strategy where traders open new trades against the current trend, hoping that a correction will occur to avoid losses. Some people believe that averaging helps limit losses, but this is not always the case. However, with proper exits, traders can reduce their losses or even zero them out. However, if the situation develops unfavourably, losses can be significant. Therefore, the question remains whether it is worth using averaging and how to apply it correctly.
This chart is an example of applying averaging in the market. The horizontal yellow line shows the take-profit point and the closing point of two trades: one with a small profit and the other with an equal loss.
Although at first glance, the application of market averaging seems simple and attractive enough, this is not always the case. In the chart above, we can see a typical result where only two pyramid trades are opened, while the market quickly reverses in the direction of the original trade. In practice, however, the situation develops quite differently. Are there any disadvantages to applying the averagingprinciple?
Let's start with the pros, which are far fewer than the cons. One of the possible and the main advantage of using the averaging method is that the trader can profit from unprofitable positions and avoid losses. However, this is only a possibility and does not guarantee success. This is just one of the disadvantages of this method, which becomes obvious if we consider a situation where a trader establishes an initial buy position at the top of the market and then establishes a second position after 1200 pips and sets the Take Profit level for both trades at the level of the yellow line. In this case, it is too early to open a third position because all the orders are usually equidistant from each other and the price has not yet reached the required number of pips. Take Profit has not yet been reached, and it is not known whether it will be reached. In this case, using Forex trading averaging, the trader risks opening a position against the trend as the price falls further, resulting in an increased floating loss. There is no way to predict when the pullback will begin and whether the price will reach the averaging level required to close all positions at zero. Ultimately, the risk outweighs the potential profit. This situation is illustrated in the chart below.
The SMA method can only be a useful trading method if the trader is experienced enough in determining the beginning and end of trends, corrections, and their duration. However, with this knowledge and experience, a trader can trade without using averages in practice.
Forex trading strategies using averages require a lot of time to set up pending orders and check them, which can be solved by the expert advisor ArgoAverager. However, one should not trust this tool completely, as it has only auxiliary functions and the trader must always monitor the market situation. Still, the principle of average positions is useful on the Forex market, but only for experienced traders, who are able to clearly determine the beginning and the end of the trend and follow the rules of money management. For beginners, it is better not to use this trading method.