What is the average price?

Average price is the phenomenon of adding orders when the price moves in the opposite direction of the Trader. The more the price moves backwards, the more orders the trader places. The purpose is to expect that once the price returns to the expected direction, the Trader will quickly make a profit.

Example of price averaging in trading

Assume Trader is buying gold at 10 USD/oz in volume of 1 oz. The price went against the trend that Trader expected, falling to 8 USD/oz. At this point, Trader continues to buy another 1 oz. Thus, the Trader's holding volume at this time is: 01oz at 10 USD/oz and 01oz at 8 USD/oz. That will be an average of 02 oz at 9 USD/oz. At this time, the market price only needs to increase to 9 USD/oz for the Trader to break even.

This is the Trader's averaging price action. Trader lowers the initial purchase price of 10 USD/oz by buying more at 8 USD/oz.

Also in the above example, if the price continues to go down, Trader buys another 4 oz at 6 USD/oz. At this time, the average price of that Trader will be: (6x4 + 8x1 + 10x1) / 6 = 7 USD/oz. It means that as soon as the price returns to the 7 USD/oz zone, the Trader will break even, including the first order to buy at 10 USD/oz and the 2nd order to buy at 8 USD/oz.

Advantages and disadvantages of Price Averaging in Trading

The advantage that many traders find is that it is possible to quickly breakeven if the price reverses in the right direction. The example above shows that. The price returned to 7 USD/oz which was breakeven for all 3 orders, although the first 2 orders Trader was stuck at quite high prices of 10 USD/oz and 8 USD/oz.

However, it is precisely because of the sounding theory that "just a little bit back and we will break even", so many Traders have fallen into this Price Average. So let's take a look at the harms.

The first harm is stuffing orders in the opposite direction. Trader buys at 10, price goes down to 8, proves Trader wrong. Correcting the mistake should be cutting old orders to wait for new opportunities, but Traders stuffed more orders, proving that they want to win enough with the market. This desire to win and lose shows that the Trader is technically and psychologically wrong. This will sooner or later cause the Trader to burn his account.

The second disadvantage is that trading has a very large leverage, so the stuffing of orders can easily lead to an early account fire due to the large trading volume and the quick run out of money. Imagine an account of 1,000 USD and Trader initially trades 0.1 lots, then because of the opposite direction, increasing the volume by 0.2 or even 0.4, just need to go back a little more, the account will quickly burn.

The third harm is that Price Averaging destroys the Trader's Trading discipline. Just 1-2 times successful averaging, Traders will think this is an effective technique, then when trading with a large account, large volume will easily get caught in the price average trap, thereby burning. large amount.

Should I use Price Averaging in Trading?

ARE NOT. In the wrong direction, the order should be cut off, not stuffed. More stuffing only adds to the burden on the Trader.

Hardly any experts recommend price averaging.

The price averaging technique can be used when wanting to buy or sell a large volume but Big Boy wants to enter the market gradually, not wanting to buy all at once, causing a market riot. They will buy gradually when the price drops or sell gradually when the price increases. However, they all have a certain STOP area. When the price breaks this zone, they close all the orders on average.

New traders can learn the above technique, ie dividing the volume to buy gradually or sell gradually. However, remember to set the correct STOP according to your trading method.