Averaging Up/Down strategy

This strategy works better for a side way trend or a price movement that oscillates between the resistance and the support line.

I wouldn’t even call this as a ‘system’ because of its simplicity.

The ‘Average Down’ involves buying additional shares (or contracts) when the price declines (vice versa applies for Average Up). Although you will be losing for a moment in a bearish market if you are in a long position, once the price bounces from the support line (that’s why I said this strategy works better in a sideway trend) you profit considerably (only if it bounces back).Thus the capital management is the key to using this strategy —you don’t want to receive a margin call before the bounce-back.

Hypothetical scenario:

(From Investopia.com)

Although the example is for stock trading, the principle applies for forex

For example, suppose that a long-term investor holds Widget Co. stock in his or her portfolio and believes that the outlook for Widget Co. is positive. This investor may be inclined to view a sharp decline in the stock as a buying opportunity, and probably also has the contrarian view that others are being unduly pessimistic about Widget Co.'s long-term prospects.

Such investors justify their bargain-hunting by viewing a stock that has declined in price as being available at a discount to its intrinsic or fundamental value. “If you liked the stock at $50, you should love it at $40” is a mantra often quoted by these investors

The main advantage of averaging down is that an investor can bring down the average cost of a stock holding quite substantially. Assuming the stock turns around, this ensures a lower breakeven point for the stock position and higher gains in dollar terms than would have been the case if the position was not averaged down.

In the previous example of Widget Co., by averaging down through the purchase of an additional 100 shares at $40 on top of the 100 shares at $50, the investor brings down the breakeven point (or average price) of the position to $45:

100 shares x $(45-50) = -$500

100 shares x $(45-40) = $500

$500 + (-$500) = $0

If Widget Co. stock trades at $49 in another six months, the investor now has a potential gain of $800 (despite the fact that the stock is still trading below the initial entry price of $50):

100 shares x $(49-50) = -$100

100 shares x $(49-40) = $900

$900 + (-$100) = $800

If Widget Co. continues to rise and advances to $55, the potential gains would be $2,000. By averaging down, the investor has effectively “doubled up” the Widget Co. position:

100 shares x $(55-50) = $500

100 shares x $(55-40) = $1500

$500 + $1500 = $2,000

Had the investor not averaged down when the stock declined to $40, the potential gain on the position (when the stock is at $55) would amount to only $500

Hopefully, you get the idea. Again, if you think the market is likely to break the support or resistance, be cautious of using Average Up/Down.

Capital management is the key.: start small (perhaps 0.1 lot), then you roll the snow ball.

I will be following up the topic by putting some screenshot of my trading performance using Average Up/Down.

P.S.: I’ve just adopted this strategy not long ago and have made a consistent profit using it. You are welcome to raise questions, doubts, or point out the flaws, or make constructive suggestions regarding Average U/D.

Happy trading!

An Average Down example in the red rectangle.

I entered the market longing at 1.20268 with 0.27 volume. You can see the several Average Down I performed in the screenshot, (the blue arrows and lines). I exited the market at 1.19018 with a volume of 2.87, profited £331.2 (the last Average Down level was at 1.18546). The Swap cost me 14.23, which is why I don’t prefer longing.

Using the Average U/D, I’m able to profit but a small amount because I’m still exploring and experimenting the proper exit. I am always impatient when the price bounce back when I start profiting; I just want to close the position to prevent drama.

I appreciate if any of you have some ideas of determining a proper exit based on Average U/D strategy.

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Hello Goodluckh4

Most traders look down on averaging down, but I do it because it helps reduce risk and maxamize profit.

I start by identifying an entry zone with my SL at one end, entry #1 on the opposite end and entry #2 at a level near the 50% mark.

Entry #2 is always equal to or larger than entry #1 depending on the perceived risk of the position and the distance of entry #1 from SL. I have 3 primary ratios that I use to allocate position size depending on the variables involved.

This method is now a key component of my risk management. The biggest downside is that I leave potential profit on the table if only entry #1 is triggered.

I feel its an acceptable price to pay in exchange for the risk reduction. And so far it has been an effective strategy.

Happy trading to you.

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Hi PanchoVilla84,
That’s a lot of insights there.

I’m new in trading, so there are some terms I don’t quite understand (50% mark…)

I was wondering if you could provide me with an example? Is your strategy applicable for all types of traders and trends?

Really, your strategy seems very logical and effective.


Halfway from entry #1 to SL is what I mean by the 50% mark. So another words, entry #2 is near the middle between entry #1 and my SL.

This only applies when I employ a strategy that attempts to capitalize on the possibility of a retracement by identifying a logical “entry zone” instead of an “entry point”.

Its not really a trading strategy or system, its a risk management method for certain strategies under the right market conditions.

Its not universal and you wouldnt want to try this approach during a strong b/o. If your anticipating a retracement however, it might work for you if executed right.

I’ll try to post an example

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Thank you so much, mate!
I’m just interested in how you would determine the exit point? Because that has been a frustration for me to find a good way out, especially using average u/d strategy.

Have a good weekend!

My exit strategy is the same in most cases with the exception of trading breakouts or range bound markets.

I’ve noticed that many traders on BP use a TP to exit a winning trade. Im not a fan of using a TP for a number of reasons. Instead, I prefer letting the market take me out as I adjust my SL to predetermined and new s/r levels as the trade evolves. I will also exit a position if price action signals a move contrary to mine.

My exit strategy for breakouts is currently a work in progress. I think a winning breakout trade is by far the most difficult trade to manage.

Yes, I agree with you that it’s hard to exit in a breakout situation—you never know if it’s a fake-out… Also, I don’t use TP and SL since I can dedicate most of the time on my trade. I simply quit the market when there are more than three consecutive bullish candles (the closing price of each is higher than the previous closing) or bearish candles.

The trends of most of the people is averaging down trending. I do it for reducing my business risk and maximize the profit. I do it with first of by identifying different entry zone. Depending on the perceived risk of the position I always keep my 2nd entry larger or equal then the first entry. To allocate position size depending on the variables involved I always maintain almost fixed ration.

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The market is open now!
I’m shorting with 0.3 volume. What’s your suggestion for a good exit point?

Good luck chaps!

Hopefully that trade is still active. 1.9641 would be a good SL rite now imo.

Good luck.

11/9 Trading Journal:

I closed 0.2 volume at 1.19795, profitted $95.4. No SL nor TP applied.
Still holding 0.1 now.

12/9 Trading Journal

I’m still holding the 0.1 short position of EUR/USD at 1.20272.
Despite the reversal of the market movement. I insist on holding the position because I must be discipline with my trading rules, for which I’d like to disclose:

Experiment #1:
Average U/D strategy: if the price goes in your favour (you’re profiting), find a place to exit but not with all the volume. Always keep 0.1 for the current position. If the price reverses, perform the opposite Average U/D accordingly—e.g., Short position: the Fibonacci level at 38.2: this is the level to reduce the position to 0.1. If the price hits 61.8, reverse the position (to long).

However, I’ve already spotted a flaw the rule endowed: what if I miss the 61.8 signal? This happens to me today. The price dipped 61.8 level while I was sleeping (I live in San Francisco, how unfortunate for a FX trader…). When I woke up, the price had bounced up. Because of the lack of precaution, I chose to hold the position instead of close it. Do you guys think I did right? My mind is still stuck in the quagmire of confusion. I appreciate it if you could help me come up with a backup plan for missing the signal.

13/9 Trading Journal

It’s a debacle. According to my trading rule I posted in the last journal, I reversed my short position to a buy order. The price of EUR/USD hit the 61.8 Fibonacci level. Maybe I’ve drawn the Fibonacci wrongly, or that my trading rule is flawed. After I reversed my position, I didn’t see the reversing of the price. Instead, it kept plummeting.

Due to the nature of the Average U/D, you can see from the chart that I placed multiple 0.1-buy orders which ultimately accumulated to a volume of 1.1, which result in a loss of $391.1 by the time I closed the trade.

Revisions are needed. I decided to add one more condition to my trading rule:

After closing the trade, wait for at least three 4-hr bars to open the next position.

Hopefully, it will help me prevent such catastrophe.
I’m sure there are losers like me today, but we cannot give up, can we? Let’s rid of all the grumps and burdens, and stretch out our arms to embrace tomorrow’s sunrise.

I’m new to this and still in demo…but perhaps I can help. When I did my analysis, the EURUSD showed a large rising wedge which would probably break to the downside to the downside (this is a typical reversal pattern). Your first short position was absolutely correct in my view. My initial prediction was that the height of the break would have been the height of the wedge (which is about 150 pips). It’s gone around 100 so far, retraced and I believe it will break downwards again after retesting a previous-support-turned-resistance (there has to be a shorter name for that).

I’m a bit confused about fibs actually because I drew mine based on what I saw at M30. That large bearish candle at H4 doesn’t show it but there was a small retracement about halfway down.The second level of retracement held at my 61.8 level and I think that the bounce it will go to the 161.8 extension (which incidentally is around 50+ pips away–the remaining height of the wedge). But then again not sure…need to do some more research. It could very well settle down and reverse, thus biting me in the arse =_=. Noone can really say where price action will go next!

Not sure if that helped (especially since I can’t upload images yet). Perhaps you can add a few patterns to your trading style, they may help to make sense of market movements (at least for me they have, since I trade around consolidations). I still find it baffling that crowd behaviour plays out like this in a decentralised system…it’s very intriguing.

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Thanks a lot Thomas. I will take your advice into consideration.
Happy trading!

14/9 Trading Journal


  • USD/JPY. A long position of 1.1 volume. Status: closed with a profit of $3.97
  • EUR/GBP. A short position of 0.6 volume. Status: closed with a profit of $777.34
  • EUR/USD. A short position of 1.2 volume. Status: running with a current loss of (523.15).

For the USD/JPY trade, I spotted a bullish trend, so I entered the market at 110.713. However, the market was not growing as I expected, and the price line had retested the resistance several times. Thus I closed the trade at 110.713. Shortly after the execution, the price drops. I was lucky in this trade. :grin:

To be honest, this is my first trade in EUR/GBP, and I didn’t trade the news (in fact, I never do so. I’m a technical analyst). The SMAs showed a bearish trend in the long run—another story in an H4 chart—and the Bollinger Band suggested a possibility for future volatility (by the time I placed the trade, the price line is within the lower band, and the Bollinger was a Squeeze). Of course, the luck played a huge part in this trade since I went to sleep when the plummeting took place (again, living in USA west coast is not quite optimal for an FX trader).

Lastly, the most traded pair in the world—EUR/USD. The uncertainty had instigated my agony; for I never be able to get a clear signal. It’s all about the serendipity. How many warriors have been swallowed into the abyss of sorrow, yet the oblivion had sequestered them.

I’m bleeding but I shall never bend.

It is very simple: It is only with the heart that one can see rightly; what is essential is invisible to the eye.

Thank @adnan who had provided me with constructive insights and tips in his thread My Target 1 Million Euros.

Keep learning lads!