There’s nothing that drives a trader crazier than patiently waiting for a set-up, pulling the trigger, and getting stopped out- only to have the trade immediately reverse, and soar in the direction you knew it would all along. I’ve been a trader for a long time, and it still drives me nuts! Not to worry though, there is a neat little trick you can use to spare yourself this all too common frustration- and not only that, but also take your equity curve to some really impressive new highs.
Dollar cost averaging is by no means a new technique. As a matter of fact, most mutual fund managers use this technique exclusively. These guys don’t even look at charts! As an example, they may buy X amount of DJIA shares every 1st of the month for the next 2 years. They are primarily dealing in stocks, however, so this is a little bit different, since we are talking Forex. The mutual fund manager assumes that companies like GE or McDonald’s are not going out of business any time soon- and he can also expect the overall value of these stocks to rise over time. He’s correct on both counts. Forex, on the other hand, is a derivative product, and such assumptions are foolish at best.
Dollar cost averaging can be utilized in Forex effectively if you know how to go about it. The most important aspect of cost averaging in Forex is having a defined maximum loss value. Using a traditional stop loss when you’re applying cost averaging is counterintuitive, because it defeats the entire purpose. We must monitor our losses by means of equity drawdown. A trader must make solid, unbreakable rules if he/she plans on having any type of success utilizing this method. Know your maximum loss value for the day, period.
The next obvious question is, “how do I know where to enter additional trades?” This can get a little tricky because it is somewhat of an art form, but I will share a personal method to help get you started. If you trade a pair that has a daily range of 100 pips, then you would add to the position every time it was down -50 pips; basically, half of the daily range for the pair. You must exercise caution because at times you may be face with a trend reversal, as opposed to a pullback. This is precisely why I had mentioned having stringent maximum loss guidelines. It may also make sense to set a limit on the number of total orders allowed- say, no more than four open orders at once.
Regardless of how one chooses to go about it, averaging positions can be a powerful technique. It is dynamic in nature, and precisely the kind of creative approach necessary to provide a trader with a real edge. When done responsibly it can transform your trading, and impact your bottom line in ways never imagined. Treat the technique with caution and discipline, and it will provide the rewards. Go about it in careless fashion, and it will clean out your account. Always remember that any method that promises huge gains can also cause huge losses. As always, cut the losses short, and let your profits run.
Go to http://www.surefire-forex-trading.info to learn how successful traders make their money.
Olliver Kennedy is a successful real estate investor, trader, and entrepreneur. Go to http://www.surefire-forex-trading.info to get all the goods on forex trading!