A forex averaging strategy is buying a commodity at different costs, regarding their average as the cost price, and eventually selling them off, hopefully to make some profits.
Here is an example of averaging in a real life situation. You buy a book for $30, and you realize that the seller can give you another two for just $15 dollar each; it will not be a bad idea to buy two more at a reduced cost. Now you have three books all together, at an average cost of $20; a good deal. If you eventually sell the books off at $25 each, that is $75 all together, you stand to make a profit of $15. This is a typical application of the averaging strategy in business. Now, note that this strategy is only profitable when you already know that you can sell the books off for $25 or more than the average cost, otherwise it will result to a loss.
FOREX AVERAGING STRATEGY APPLICATION
Here are some things to put in place to make sure this strategy works for you in the forex market.
- THE HISTORICAL RANGE OF THE MARKET:
Take note of the historical time range of the market regarding the commodity of interest. This will help you to know when to buy or sell your currency pairs. Buying is best when the price of the currency pair is at the bottom third of the historical time range. Sell only when the pair is at the upper third of the historical time range.
- POSITION BUILDING:
Position should be opened based on the price of the currency, not the signal. After that, one of the following is likely to take place
i. Liquidate your position and wait for another entry if the position moves to a profit of 50 pips
ii. Enter a different position of the same size with the same direction if the position moves to a loss of 50 pips
CHALLENGES OF FOREX AVERAGING STRATEGY:
1. Traders that wish to try out this strategy should know that it is as risky as every other forex system.
2. It requires a healthy financial reserve to efficiently pull off a reasonable trade
3. Swap charges apply, and will add up over time
BENEFITS OF FOREX AVERAGING STRATEGY:
1. It can produce a steady cash flow should it be approached as an investment strategy
2. Good money management applies for this strategy
3. With a good money management system in place, the forex averaging system is relatively safe.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.