The everyday rule “don’t put eggs in one basket” is relevant not only when it comes to the problems of saving financial resources. The principle of diversification is equally applicable to investments in the stock market, Forex and binary trading.
If you adapt the proverb to the realities of trading, you get the following expression: “don’t invest all the money in one asset.” You can’t open one option for all available funds, even if you think that the transaction “will pass” with absolute probability. There is always a risk of draining the deal, even if you were sure that everything would go smoothly.
Even the most stable assets sometimes behave unpredictably, because price fluctuations are influenced by hundreds of parameters that can’t be taken into account all at once.
How averaging works in practice
The principle of averaging involves the division of one investment into several equal parts. For example, if you want to open a trade for 300$, you need to activate not one option for the entire amount, but 5-10 options for 30-60$ each.
The exact number of transactions depends on what timeframes you work with. The longer the expiry time, the greater the number of parts can divide investment. Options up to 6 hours are desirable to break up into no more than 10 transactions.
The most important thing in the principle of averaging is to choose the right delay between opening and closing options. If you make 5-10 trades one after another without delay, you won’t get any profit, because in case of a discharge most options will be closed in the negative – the price simply won’t have time to grow or fall to reach the point at which the option conditions will be met. The gap should be such that, in the event of a plum, the schedule has time to change the rate so that the following transactions are closed with a profit.
Example of averaging an option
- Option with closing at 02:14 the next day;
- Option with closing at 02:17 the next day;
- Option with closing at 02:19 the next day;
- Option with closing at 02:25 the next day;
- Option with closing at 02:28 the next day.
If the first deal closes in minus, the asset has time for correction. In this case, if the situation is equalized, the subsequent options are likely to be closed in plus. If the trend goes against the expectations of the trader in the opposite direction, then the forecast was initially incorrect – the trader either couldn’t correctly interpret the signals of the indicators, or took advantage of a non-working strategy, or applied the strategy incorrectly.
Interesting fact: in addition to binary trading, averaging is used when trading in the stock market. Only in this case it is necessary to physically wait several days / weeks / months to implement the scheme so that it is possible to effectively diversify the investment. While in binary trading it is enough to set a convenient expiration time, after which the transaction will be closed automatically without the participation of the trader. It is convenient and saves time.
Disadvantage of the averaging method
Averaging method is not effective on all time segments. The strategy works best with expiration periods from 5 minutes to several hours. If you work with 5, 15, 30 or 60 seconds trades, you simply can’t diversify funds within one trend in time. Imagine a situation:
You trade on a pair of USD/AED with expiration period of 30 seconds. Turn on several indicators and expect a steady signal. Successfully open the first deal and want to open a second one in order to diversify the investment within one trend. But here’s the bad luck: while you open the option, the micro-trend has changed, so you need to wait for another signal to not open a blind deal.
In contrast to the fast options, long transactions give you a head start to maneuver. You get time to think about investment tactics and open several options within one trend. Therefore, the averaging method isn’t suitable for fans of fast and aggressive trade.
If you are a supporter of accurate and moderate investments, be sure to use averaging to reduce risks. This tool will help you to save your investment portfolio from large cash losses. Also, the principle is suitable for working in unpredictable and unstable markets.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future
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