Position averaging is the trading strategy of forex traders who are managing the formation of the general average price of a certain currency pair while having their opening position unfavorable. Although this strategy can work perfectly if applied, it poses lots of risks once implemented. Liquidity traders tend to make some errors whenever they apply for positions, averaging something that leads to huge losses. Below are problems that are likely to be encountered and ways of avoiding them.
1. Ignoring Risk Management
Traders most often fail to pay much attention to the correct risk management practices. Position averaging means putting more money into the exact position that is losing which of course amplifies the risk. Lack of predefined stop loss levels or risk limits makes the trades enter a position and at some point, they find out that to cover that position is more than what they can afford.Using tools from JM can help traders implement proper risk management strategies and avoid such pitfalls.
How to Avoid:
Before actually dealing in the market, always establish the maximum amount of money you can afford to lose in any set trade.
Always employ stop loss orders to ensure that your losses are well contained even when you are keeping on averaging down.
2. Averaging without a plan
A vast number of traders end up averaging down emotionally, when all they want is to see the market turn in their favor. This approach is normally influenced by emotions rather than a strategic plan hence leading to poor entries and further losses.
How to Avoid:
Formulate a clear trading strategy, which will spell out the times when you are going to apply position averaging.
Do not use hunches when it comes to decision-making; instead, follow technical and fundamental analysis.
3. Over-leveraging
Forex trading is given at very high leverage, thus meaning that trades can control big contracts with relatively small amounts of money. Consequently, it has been observed that using leverage means that gains can be multiplied while losses are as well. The leveraging of the average-down technique also means a margin call or account liquidation if the market persists in going against you.
How to Avoid:
I recommend you to use leverage sparingly and avoid the top leverage level provided by your broker.
4. Failing to Consider Market Trends
One bad practice is averaging down in a highly directional market and expecting that the price will revert at some point. This especially holds in forex because such trends may endure for many years on account of macroeconomic fundamentals, policies conducted by the nation’s central bank, and politics and other global events.
How to Avoid:
Never average down when trading in a trending market unless your chart shows the situation is likely to reverse shortly.
Trend indicators are to follow the trend to predict the market direction, they include moving averages or trend lines.
5. Misjudging Market Volatility
Forex markets are always volatile and averaging during periods of high volatility is a very dangerous thing to do. Fluctuations cause drawdowns to occur without an opportunity for the market to climb back up.
How to Avoid:
Keep abreast with market movements and refrain from trading during high-impact events such as us, specific news releases, or Central Bank announcements.
For further information about measuring the level of volatility, the Average True Range (ATR) indicators can be used.
6. Not Setting Your Break-even Point
The other common mistake is when one does not estimate the break-even point after averaging down. Lacking this level, traders may trade out or trade-in too long with the hope of recording gains thus incurring more losses than necessary.
How to Avoid:
After each averaging entry, you rewrite the break-even point or recompute it anew.
It should be used as the benchmark in setting of the exit strategies level.
7. Mistaken use of Position Averaging
Some of the traders however depend fully on position averaging as a means of getting out of the hole. From this mindset, it is possible to repetitively apply a strategy and transform controllable loss into a tragic one.
How to Avoid:
When implementing a position averaging strategy, this should be just one of the trading strategies which are to be adopted.
Be ready to make losses and get out of your trades whenever the market disapproves of your analysis.
Conclusion
Deriving benefits of position averaging in forex is okay and safe, but it’s important to note that this trading tool is also associated with certain risks. Due to this, the trader needs to operate with caution, and follow a set strategy and diet so as not to be caught up in the common mistakes of trading. With the knowledge of the possible problems, position averaging should work as a useful addition to your trading arsenal. Down the line never forget that it is all about managing your risk and keeping your emotions out of trading when trading in forex.
