Never Average Down

All traders are familiar with the maxim; ‘Never Average Down.’

Never averaging down may be an appropriate guideline when applied to long-term investing, but it often means lost profit opportunity or even losses when applied to day-trading the foreign exchange market.

Such an idea implies, for example, that you know precisely where the top or bottom of a market is, or at least that you know the direction of all future moves within your trading timeframe. Of course, anyone with an ounce of day-trading experience knows that such an idea is foolish as it’s only in retrospect that ‘tops’ and ‘bottoms’ can be identified with certainty.

Day-trading is all about discernment; discerning direction, discerning risk, and discerning the probable strength of a currency’s move. Price action often moves against your position after you’ve placed a bet (long or short), but that could offer an opportunity to improve your position by ‘averaging down’ rather than be a signal to just sit and suffer.

In other words, it depends on what other signals are indicating, and on what other currencies are doing, when the price moves against you. If you calculate that there are multiple signals/indicators moving against you, it may be best to exit immediately, or to exit and reverse your position. Again, day-trading is all about discernment.

Discernment is a function of experience. Pilots unfamiliar with certain weather conditions can make fatal decisions … and I’ve known some who did. With experience pilots can learn to safely navigate using the dials, indicators, and instruments that convey meaning to them. The same is true of traders. Inexperienced traders can make catastrophic trading decisions because they lack the acumen to discern with accuracy the risk of taking or of staying in a position.

‘Never Average Down’ is one of several misleading investment maxims that do not necessarily apply in the world of forex trading.