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Dollar cost averaging

Smoothing out market surges and declines

Systematic investing—saving away a calculated amount of money on a regular basis—is called the dollar-cost averaging strategy, which is a time-tested way to make serious savings. But the strategy itself adds several more significant advantages to this. When automatically investing the same amount every quarter or year, the dollar cost averaging strategy is:

► Disciplines. If you adopt this strategy for yourself, the precise timing will serve as a reminder to invest at the appropriate time and amount. ► Eliminates the problem of making a decision every time when to invest. When the next deadline comes, you simply invest the required amount of money, regardless of the market situation. ► Helps avoid the temptation to “catch” the best time in the market. Some investors cannot resist the temptation to invest money when the market passes a low point and take profits when it passes a high point. As a rule, such investors fail because such a task is not realistic to carry out even for an experienced expert.

How Dollar Cost Averaging Works

The idea is to invest a sum of money on a regular basis, and then the value of the shares tends to a midpoint, falling out of the influence of market peaks and troughs. Your dollars will underbuy a few shares when the market is up, but this will balance out in full when the market is down. And then, as long as you understand that you are not trying to catch a positive result by buying at the bottom and selling at the top, you do not suffer from the opposite actions. With averaging, the general rise of the market gives you the opportunity to accumulate funds gradually in a systematic and organized manner.

Four things to remember about dollar cost averaging:

► When planning long-term investments, the moment of investment (market condition) does not matter; the main thing is to start. Given a sufficiently large period of time planned for investment, and when deciding when to start, the state of the market does not play a significant role. ► Adding to your investment account on a quarterly basis gives you four times the opportunity to profit from market fluctuations than investing on an annual basis. The more frequently you invest and the longer you maintain an investment account, the smoother your average dollar value and average investment cost become shares ► A market downturn can typically mean a fall in prices. Unless you were planning to sell shares (reduce or close an investment account), then a lower daily price of securities to one degree or another is not a guideline for those who do not intend to curtail investments. So don't panic if you see a drop in value. The fact is that the decline offers the opportunity to purchase more shares at more attractive prices, and they will increase in value when the market finally moves up, which is inevitable. ► Be prepared to ride out a prolonged market downturn. Keep in mind that in order for dollar cost averaging to work, you must prepare financial resources and, no matter what, find the determination to make a contribution on the appropriate day.

Regular investing does not improve returns or provide additional protection against losses if the market fails. An investor must evaluate his or her ability to make investments over a long period of price fluctuations.

Averaging as a strategy in binary options trading.

What to do with a position that has entered the loss zone? Options traders ask these questions quite often. The simplest, but rather unpleasant way is to wait for the end of expiration and receive a corresponding loss on the contract. But it’s difficult to call this a way to solve the problem. You can intervene in the process and do everything to ensure that trading turns out to be profitable. A panacea for this problem already exists - averaging positions allows you to correct the situation.

Using Averaging When Working with Options

Averaging is the execution of contracts according to certain rules that cannot be violated. By using this trading method, you can ensure your overall trading success by concluding a certain number of additional contracts, the profit from which will make it possible to cover the loss on the primary transaction.

It is very important to choose a modern, high-tech terminal that allows modern traders to work efficiently. Only trusted brokers have such terminals; this must be taken into account when choosing.

As an example, consider the platform from Finmax:

• The trading asset quote chart allows you to track trading positions automatically, this allows you to quickly respond to any situational changes, intervene in the transaction and apply averaging;
• 5 milliseconds are enough to execute the given order, no slippage (this is a real necessity, allowing you to select the desired position when averaging);
• The quote chart is open in a large window. This allows you to qualitatively and quickly analyze asset quotes;
• It is possible to scroll back the quotes chart. This allows you to view and analyze the history of quotes. You can change the scaling to determine trends over different time periods;
• It is possible to use minimum lots of $1. This makes it possible to correctly calculate risks and conduct disciplined money management.

The Finmax trading terminal is an ideal option for using averaging. Thanks to its key advantages, the Finmax platform is actively used by modern traders.

If we have already decided on a trading terminal, we can understand the rules of the system.

There are certain rules that will help us make a series of contracts for averaging profitable, and will not allow us to lose the entire deposit:

• All contracts must be executed only in the direction in which the trend is moving;
• No more than 3 items as an addition;
• Make sure that there is an equal distance between new positions;
• Use only minimum lots.

By adhering to these rules, you will definitely improve your performance when trading binary options.

Trading with the trend

There is nothing difficult about trend trading.
We set the most minimal scale on the quote chart, look at the minimums formed by the price quotes, and draw a trend line (this makes it possible to determine a growing trend). If the trend is downward, draw a line through the highs.

Trading on a rebound from a set trend level is the best way to make profitable trades. It is necessary to conclude transactions at the moment when one of the trend levels touches the rebound.

Nuances of correct averaging

Now let's look at the averaging process itself. It can be used if the quotes touch the trend line, you enter into a deal, but immediately after that the price breaks through the level and gradually takes the deal to a loss. We need to wait for the quotes to be gradually removed, immediately after this we open another 1-3 trading positions, maintaining an even distance between them.

In total, we draw up 4 contracts. What this allows you to get:

If the price quotes reverse again and the trend continues its main movement, all our contracts will make a profit;

Averaging positions allow us to fully compensate for the losses associated with the first contract.

As with other trading systems, there are times when seemingly 100% proven algorithms do not work. But this happens in 30% of cases. But in 70% of cases the quotes will return to the trend movement, which will allow us to increase our earnings.

Let us remind you that only proven, professional software is suitable for high-quality trading. This is where traders have access to an abundance of financial as well as analytical tools.

Learn more about binary options trading and Forex trading.

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What is averaging?

Let's say that after celebrating the New Year you have a certain amount of money left, for example, one hundred and twenty thousand rubles, which you want to invest in the stock market. There is a certain security on the stock exchange that costs 100 rubles in January. The main question that worries an investor is: “when to invest in this stock?” The price of paper may go up and down. Depending on the choice of entry point, an investor will receive completely different results when investing in the same instrument.

Let's make further assumptions. The share price changed by month as follows: 90 (Feb), 95 (Mar), 105 (Apr), 115 (May), 130 (Jun), 90 (Jul), 85 (Aug), 100 (Sep), 110 (Oct ), 115 (Nov), 125 (Dec), 120 (Jan). If there were stock analysts in our fictional world, they would say that the security showed a 20% return for the year.

However, if our investor had waited just a month to invest, he would have received a return of 33%. And having successfully invested your capital in August, you would have earned 40%. Note that the stock's return for the year has not changed. Obviously, it comes down to the purchase price. Having chosen June as the entry point into the market, the investor would have ended the year with a loss of 8%.

It is clear that choosing the right entry point increases the return on your investment. But they haven’t yet come up with reliable ways to find this best entry point. It's easy to choose with hindsight. But in January it was not at all so obvious that the stock from the example would begin to grow in mid-spring, reach a peak in early summer, then collapse again, but by the end of the year it would improve its position.

In order not to rack your brains over choosing the right moment to start investing, an averaging strategy was invented. Instead of looking for the right moment to invest, the capital is divided into 12 parts. These parts are invested in securities once a month. What will be the profitability of the example investor who used averaging? 14%.

The calculation is simple: the final share price must be divided by the average price of the security for the year . This is the same averaging. We average the purchase price. It is clear that it will be less than the maximum, but greater than the minimum. In our example, the average price is 105.

It is easy to conclude that the averaging strategy is beneficial when the average price of a stock (or any other security) is lower than the initial price . Guess for yourself how the stock should behave to fulfill this condition.

The conclusion that I wrote three years ago: there is no need to average. Invest immediately.

Commentary from Arsagera Management Company Investing all your capital at once may not be the best choice for novice investors. Psychologically, it is much easier to accept a loss of profit than a very real loss. Let’s imagine that a person kept money on deposit for several years, received interest, and then he was “dragged” into the stock market... and the market took it and “fell” by 10% in a day. All the interest that had accumulated over the years disappeared in one day. An unprepared person will be shocked by such a development of events and will forever receive a “vaccination from investments.” Therefore, for novice investors, as well as those who are afraid to invest “everything at once,” the averaging strategy is preferable.

Averaging a losing position

This type of averaging is one of the most dangerous trading techniques, which rarely brings benefits. Losing position averaging refers to a strategy that is used to reduce the average entry price for a position that is trading against you.

Traders use this strategy with the expectation that the price will reverse, the second position will become profitable, and they will be able to close the first position without a loss. In rare cases, this approach may work and the market will change its direction, which will give a chance to exit a losing position with a profit using averaging.

But most often you will use averaging until you receive a margin call (margin call), meaning you can close open positions, but cannot open any more new ones. And in this case, you will most likely lose most or even all of your funds.

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