Average Down Strategy

Average down Strategy
"An investor without investment objectives is like a traveler

without a destination". Ralph Seger
Introduction
"Know what you own, and know why you own it ."
Peter Lynch
Every professional trader uses a system. Some systems are very complex, requiring years of
research and dedication, while other systems are easier to master.
It is unwise to start trading without using a trading system or strategy. Investing blindly without
a strategy will get you nowhere. You may earn a few dollars here and there, but not a constant
return.
When you have a system, it is easy to see whether you are making progress, or need to take
a step back to evaluate, and learn from your mistakes, adapting your system to the current
market environment.
HIGH RISK INVESTMENT WARNING: Trading Foreign Exchange (Forex) and Contracts for Differences (CFDs) is highly speculative, carries
a high level of risk and may not be suitable for all investors. You may sustain a loss of some or all of your invested capital, therefore, you
should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin.
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authorized and regulated by the Cyprus Securities Exchange Commission (CySEC) under license no. 092/08. Safecap Investments Ltd is
located at Treppides Tower, 6th Floor Kafkasou 9, Aglantzia P.O.Box 26522 CY2112, Nicosia, Cyprus.
Most successful traders do not have degrees in finance and they are not using
overly-complex systems. In this guide we will help you understand one of the more
straight-forward and easy to master strategies used by many traders today. It is
called the Average down strategy. This strategy rests upon the markets tendency
to be cyclical and to experience a lot of bumps and corrections along the way, as
opposed to moving in straight lines. Usually when a resistance or support level
is hit, the market corrects. Following this correction, market traders review the
fundamental data and decide in which direction to move.
Market Cycle
Start of
the move
Resistance
Temporary
Support Levels
Support
Reversal
This strategy is particularly successful when dealing in Forex, as opposed to equities,

which are not as range bound, as you will see in the following charts.
Apple VS EUR/USD from 2005 to the present day.
Apple
$720
Range
between
$20 & $720
$20
eur/usd
1.60
Range
between
1.18 & 1.60
1.18
Explanation
The Average down strategy allows you to take advantage of the market's tendency to correct.
When using this strategy you can benefit from market corrections even when the market fails
to reach your initial entry level.
In the below chart you will see an example of a trader who decided to enter a long (buy) position.
The market initially moved against him. However, using the average down strategy, he earned
a sizable profit before the price reached his initial entry level.
Market Cycle
Enter a long position

Profit on the entire position
1st addition to initial position in

average down strategy
2nd addition to the position in
Buy
order
3rd addition to the position in

When implementing the Average down strategy there are two questions that need to be taken
into consideration:
i.
ii.
What multiplier will you use to increase your next position?

How many pips will you wait until you start adding to the initial position?
Evidently, your level of exposure increases, when you use a higher multiplier. As you can see
from the below table, if your original trade is 0.01 lot and you are multiplying each position
by 1.2, your 6th trade in the sequence will increase your market exposure by 0.3 Lot. If you
decide to use a higher multiplier e.g. 2, your 6th trade will increase your market exposure by 6.4
Lot. Needless to say, as you increase the multiplier, your risk grows, along with your potential
market exposure.
On the upside, when you use a higher multiplier, each position requires a smaller correction
before your total trade breaks-even.
1st
Trade
size
2st
Trade
size
3st
Trade
size
4st
Trade
size
5st
Trade
size
6st
Trade
size
Trade multiplier
Original
position
size
Multiply next position by
0.10 Lot
0.10 Lot
0.10 Lot
0.10 Lot
0.10 Lot
0.10 Lot
0.10 Lot
1.2
0.10 Lot
0.12 Lot
0.14 Lot
0.17 Lot
0.21 Lot
0.25 Lot
0.30 Lot
1.4
0.10 Lot
0.14 Lot
0.20 Lot
0.27 Lot
0.38 Lot
0.54 Lot
0.75 Lot
1.5
0.10 Lot
0.15 Lot
0.23 Lot
0.34 Lot
0.51 Lot
0.76 Lot
1.14 Lot
1.6
0.10 Lot
0.16 Lot
0.26 Lot
0.41 Lot
0.66 Lot
1.05 Lot
1.68 Lot
1.8
0.10 Lot
0.18 Lot
0.32 Lot
0.58 Lot
1.05 Lot
1.89 Lot
3.40 Lot
0.10 Lot
0.20 Lot
0.40 Lot
0.80 Lot
1.60 Lot
3.20 Lot
6.40 Lot
Increasing level of Risk &

Market exposure
The same holds true for when you start adding to the initial position. The smaller the pip
increment you use when starting to average down the quicker the increase in exposure. It is
important to take market volatility into account when deciding at what point to add to your
position.
As illustrated in the table below, if you add to your position every 45 pips, your 6th trade in the
sequence will be 270 pips from your initial entry. If you increase every15 pips your 6th trade will
be just 90 pips away from your initial entry.
Trade Frequency
1st
Trade @
2st
Trade @
3st
Trade @
4st
Trade @
5st
Trade @
6st
Trade @
Increase position each 45 pips
45 pips
90 pips
135 pips
180 pips
225 pips
270 pips
40 pips
80 pips
120 pips
160 pips
200 pips
240 pips
35 pips
70 pips
105 pips
140 pips
175 pips
210 pips
30 pips
60 pips
90 pips
120 pips
150 pips
180 pips
25 pips
50 pips
75 pips
100 pips
125 pips
150 pips
20 pips
40 pips
60 pips
80 pips
100 pips
120 pips
15 pips
30 pips
45 pips
60 pips
75 pips
90 pips
Increasing level of Risk &

Market exposure
Example
As an example we will take a trader who trades on the EUR/USD.
He wishes to take 60 pip profit on his positions and uses an average down strategy in which he
opens additional positions every 40 pips with a 1.4 multiplier.
Entry of 0.10
lot @ 1.3060
1st pos of 0.14

lot @ 1.3020
2nd pos of 0.20

lot @ 1.2980
Profit of $121.45 when

the position hits the
take profit @ 1.2920
3rd pos of 0.27

lot @ 1.2940
4th pos of 0.38
@ 1.2900
5th pos of 0.54

@ 1.2860
Break Even on
total position @
1.2912
As you can see the trader in this example bought the EUR/USD at the moment the market
started to drop. However, by using the average down strategy, where he continued to buy long
positions, he managed to earn a $121.45 profit, 140 pips below his initial entry level.
Practice trading with the average down strategy, and sharpen your skills, risk-free, with
$100,000, in a demo account.
Alternatively, use the strategy as a basis for building your own personal system and
trade now utilizing the strategy to boost your trading potential today.
We hope you found this explanation valuable. Please dont hesitate to contact a member
of our team if you have further questions or wish to learn more about trading strategies.
To maintain your market edge it is always advisable to employ a trading strategy. However,
please note that in presenting the Average Down Strategy, as a potential approach to meet
your investment needs, Markets.com in no way guarantees a profit on investments made as
a consequence of utilizing this strategy.
Glossary
Asset: A resource with economic value such as a currency pair, commodity, index, or share.
Entry Level: Rate at which you enter the first trade of your strategy
Long Position: Buying of an asset, with the expectation that it will rise in value.
Lot: The standardized quantity of a financial instrument in case of forex 1 lot usually stands for
100.000 units ($100.000)
Market Cycle: Trend or pattern that exists in a given market environment.
Market Exposure: The amount of funds invested in a particular asset.
Multiplier: The factor with which you multiply your next position.
Pip: The Smallest price change that a given exchange rate can make usually 0.01 cent.
Range: An assets low price and high price for a particular trading period. Often the price
remains between these 2 levels for a longer period of time.
Resistance Level: A level that caps the increase of an asset over a period of time.
Short Position: Sale of a borrowed asset, with the expectation that it will fall in value.
Support Level: A level that caps the decrease of an asset over a period of time.
Take Profit: The level at which a trader wants to take his profit.
Treppides Tower, 6th Floor Kafkasou 9, Aglantzia P.O.Box 26522 CY2112, Nicosia, Cyprus.

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Average down Strategy

"An investor without investment objectives is like a traveler

This strategy is particularly successful when dealing in Forex, as opposed to equities,

Enter a long position

1st addition to initial position in

3rd addition to the position in

What multiplier will you use to increase your next position?

Multiply next position by

Multiply next position by

Multiply next position by

Multiply next position by

Multiply next position by

Multiply next position by

Multiply next position by

Increasing level of Risk &

Increase position each 45 pips

Increase position each 40 pips

Increase position each 35 pips

Increase position each 30 pips

Increase position each 25 pips

Increase position each 20 pips

Increase position each 15 pips

Increasing level of Risk &

1st pos of 0.14

2nd pos of 0.20

Profit of $121.45 when

3rd pos of 0.27

5th pos of 0.54

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