Imagine the real world scenario.
You have bought 2 sunglasses each for 20 USD. Then you found out you can sell them for 30 USD each. Great. You need to buy more sunglasses. Second time around you bought 10 sunglasses each for 10 USD. Even better. Why not more ? Finally, you bought 30 sunglasses each for 5 USD.
You end up having 42 sunglasses, that you bought at average price of 6,90 USD, paying total of 290 USD. And you sold them for 1344 USD. Congratulations. You have just used averaging down in real life business, and it was not that risky.
If you, however have bought sunglasses for all your life savings. Sold your house and car, bought thousands of sunglasses and then failed to sell them at profit, it would be called dumbing down.
Same applies to averaging as forex strategy. It can be done right and be great tool or done dumb - fool and his money will be separated.
Averaging forex strategy done right.
Timeframe 1 month.
We consider historical range of the market.
Buy only: bottom third of historical price range.
Sell only: upper third of historical price range.
We pick currency pair that is meeting our requirements for price being in upper third/bottom third of historical price range.
We consider this range in relationship to our account ballance.
We determine our position size and position distance increments. However price range is not written in the stone and it can change. Therefore, be ready to hold about 2x as many positions at extreme situations.
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Position building:
We open position based on price, not specific signal. After we open position, one of two scenarios might happen.
Position moves to profit of +50 pips. We liquidate position and we wait for another entry.
Positions moves to loss of -50 pips. We enter another position same size and same direction.
Backtest results since 2007. Similar results by live and demo trading since 2013.
By creating next order at better price we have increase position size and improved our average size.
Again we are looking to get in profit of +50 pips (measured from average price). We repeat this scenario and average the position until we manage to close it in profit.
We are always looking to get position at better price at minimum distance 50 pips from previous. We take profit +50 pips measured from average price.
After we liquidate all existing positions on currency pair, we wait for another - good enough price to enter.
You can adjust the risk: Widening position increments, lowering position size.
Example:
Upper zone In AUDCAD gives us about 1000 pip range to trade.
If we place orders in 50 pips increments and our position size is 0,01 pips, we will risk about 1000 USD if we place our first averaging order at inner range, and last (20th) at outer boundaries of range.
Therefore, holding position of 0,2 lots at average price of all orders. When we consider that range can expand, we need to be able to hold at least 30 positions in 50 pips increments.
We always consider the worst case scenario. If we can manage the worst possible situation, this strategy becomes walk in the park and a pleasure to trade.
Cons:
No safe forex trading system was ever devised. Averaging is no different. It can lead to margin call.
This is not trading strategy for poor and needy. You need to have financial reserve.
Substantial capital is required to trade it safely. (above 5000 USD on 1 microlot and 1 currency pair).
Investors will be needed. Reserve capital will be needed (or plans to get both).
Withdrawal might be problematic. (With some brokers). If you still hold opened positions.
In case of super trends with no significant correction you might be stuck in position for months or years.
Swap charges will add up overtime.
Pros:
No losing days. No losing weeks. No losing months. No losing years. In balance. Equity curve might take some dips.
Can produce steady cashflow if you approach it as investing strategy.
No stress forex strategy. If you did your homework on money management.
As presented is relatively safe when solid money management is employed.
