Key principles of averaging

• 02nd Feb, 2025 07:31 AM

Averaging is a popular risk management strategy that allows traders to reduce the average entry price of a position when the asset's price declines. In the cryptocurrency market, this strategy is especially relevant due to high volatility. In this article, we will discuss how to properly average at local horizontal levels to minimize risks and increase the chances of profit.

What are local horizontal levels?

Horizontal levels are price zones where an asset has previously shown significant resistance or support. These levels form when the price repeatedly stops or reverses in the same zone, indicating market participants' interest.

"Horizontal levels are key zones where supply and demand are in balance."

On a chart, such levels are most often seen as lines drawn through local highs or lows.

Key principles of averaging

1. Identify key levels before entering a trade

Before starting to trade, conduct technical analysis and identify support and resistance levels. These zones will serve as reference points for averaging.

• Use historical data to find zones where the price has most often paused.
• Pay attention to levels with high trading volume — these are usually strong zones.

2. Plan averaging in advance

Averaging should not be an impulsive decision. Determine in advance:

• The number of levels for averaging. For example, 2-3 key levels.
• The volume for each level. Divide your capital into parts to have funds left for lower levels.

3. Use level confirmation

Do not average immediately when the price reaches a level. Wait for confirmation that the level is indeed holding.

• Confirmation can be a candlestick pattern (e.g., "pin bar" or "bullish engulfing").
• An increase in trading volume at the level is also a good signal.

4. Do not average indefinitely

Set a limit on the number of averaging attempts. If the price breaks through the last support level, this could be a signal to exit the position.

5. Use stop-losses

Averaging is not a substitute for a stop-loss. Always determine the level below which you will exit the trade to avoid significant losses.

Example of an averaging strategy

Situation:

The price of an asset is trading at $100. You have identified two horizontal support levels: $90 and $80. You want to average at these levels.

Plan:

• Buy 1 lot at $100.
• If the price drops to $90, buy another 1.5 lots.
• If the price drops to $80, buy another 2 lots.

Calculation of average price:

• After the first purchase: 1 lot at $100.
• After the second purchase: (1 * $100 + 1.5 * $90) / (1 + 1.5) = $94.
• After the third purchase: (1 * $100 + 1.5 * $90 + 2 * $80) / (1 + 1.5 + 2) = $86.67.

Thus, even if the price drops to $80, your average entry price will decrease to $86.67, increasing the chances of profit if the price recovers.

Common mistakes when averaging

• Averaging without analysis. Never average "randomly." Ensure that you add to your position at key levels.
• Lack of limits. Averaging should be limited by the number of levels and the amount of capital.
• Ignoring the trend. If the asset is in a strong downtrend, averaging may be ineffective.
• Lack of an exit plan. Averaging should be accompanied by a clear strategy for exiting the position.

Conclusion

Averaging at local horizontal levels is a powerful tool that allows for effective position management and reduces the average entry price. However, its use requires a clear plan, market analysis, and discipline. Never average impulsively or without understanding the current market situation.

By following the described principles, you can minimize risks and increase your chances of successful trading in the volatile cryptocurrency market.