Ever entered a trade and watched it go down? Did you then think “Man, if I liked this at X price, why wouldn’t I like this at X minus a few bucks?”
If you did, you were thinking about averaging down on a position. That is, buying more of a trade after your first order has already shed some value.
Averaging Down Example
You’re trading cable (GBPUSD) long term with a 1 lot position that you purchased at 1.55. Over the next few weeks, the pair falls 1000 pips to 1.45. You’re down $10,000, but you still think this trade is it, the pair will rebound and if you buy more (average down) you’ll bring in the bank on the uptick.
At 1.45, 1000 pips off your first entry, you average down with a 10 lot order. In doing so, you now have 10 times more exposure than you originally had, at an average price of 1.4590. Once the pair moves over 1.4590, your trade is profitable, instead of the 1.55 price it originally had to rise to.
Averaging Down Mathematics
From the example above:
1 trade of 1 lot at 1.55
1 trade of 10 lots at 1.45
Equals
11 lots at an average price of 1.4590
The Downside to Averaging Down
The concept of averaging down on a losing position is controversial. Some see it as an excellent way to get a trade you like for cheaper, but with more exposure. Others see it as pure suicide…why would you put more into a losing trade?
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