Emotional decisions usually cause the most mistakes in managing forex trading. For example, a trader adds a new position just because the current position is profit. Moreover, the trader moves the Stop Loss level even further because his trading position is currently losing money.
Another case, traders who change the risk/reward ratio that has been predetermined, just because they see price movements that seem no longer in line with estimates; perhaps by exiting at the breakeven level or minimizing risk by leaving at a loss.
Some of the examples above are the mistakes that are usually made by a trader with a not detailed trading plan. Thus, they make decisions based on sheer emotions. Therefore, a trader needs to map out the next steps after opening a trading position (entry/open position), either by doing averaging or applying a Trailing Stop.
Averaging
In fact, trading management is simple and does not contain complex formulas. One of the common methods applied in forex trading is Averaging.
Averaging is a step to add or open new trading positions when you already have one or several positions that are open. According to Dummies, averaging into a position refers to the practice of buying/selling at successively lower/higher prices to improve the average rate of the desired long/short position.By analyzing the current market conditions, you can decide on the most logical exit strategy. Whether it is still possible to open new trading positions with the same exit level in these market conditions. There are two types of Averaging, that is Average-In and Average-Out.
Thus, what are the differences between Average-In and Average-Out?
Averaging-In
The safest way to add a new position if the market conditions are to use the profit that you have gained. By doing this way, the worst possibility is that you come out at the breakeven level with no risk. You can apply this method well in trending market conditions.
Averaging-in means making the average price of your open positions closer to the current market price. Therefore, if you do not move the Stop Loss level of the current profit position. It means that you will even increase the risk by opening a new position.
Averaging-Out (Scale-Out)
The averaging-out principle is the same as averaging-in, but the lot size for added positions is smaller. It is usually half of the first position to reduce risk factors. There are those who disagree with this method because they are doubtful and do not maximize profit if market conditions are still possible.
Read more: How can Emotions Affect Your Trading?