Ever heard of “cost average investing”? Well it doesn’t really work in the forex market. Cost average- investing is when, let’s say, you buy something at the price of 10, then the price drops to 5 and you buy again, so your average price for buying that something is 7.5 (average of 10 and 5).
Which means you were able to buy the price of that something at a lower price which should be good right? Well, in other markets, probably, but in the forex market, it is synonymous to suicide. Unless you are an advanced trader who understands how to “scale in” trades or “build your position,” I would warn starter traders to avoid cost-average investing in the forex market like the plague. Reason being the forex market is a pure two-way street where the price of currencies do not always go one way (up) but can go the other way (down) for months even years without heading back up.
To illustrate how dangerous a mistake this is, here’s another story of a student of mine that kept adding to a losing trade. The year was 2007. For two weeks, there was a huge crisis brewing in China and the GBP (Great British Pound) was crashing relative to the USD (US Dollar) because of it. My student had $30,000 in his account at that time and he had pulled that money from his 401K in the U.S. (Yes, I do have U.S.-based students as well) to invest in forex.
It was just his luck that he had bought the Pound at the exact hour the pound started to crash. At first, his account went down by 10%. He kept his cool and proceeded to “cost-average” his trade by buying again at a lower price. The price started to plunge further and his account was now down a whopping 30%. He asked me what he should do to which I replied, cut your losses now and stop adding to your trade. I later found out that he didn’t listen and instead kept adding to his losing trade and by the time he realized he shouldn’t have, it was already too late. His $30,000 account had dropped to $6,000.
So remember when I say, never, ever add to a losing trade, cost averaging in forex will do you more harm than good.
Stay tuned for the next article where I talk about Mistake # 5. Engaging in “Vengeance Trading” and why letting this phenomenon is important to be aware of so you can avoid it.
In the meantime, I would love to get your feedback for this article and the past articles, please do visit my blog at wealthflowproject.com and leave a comment on this and many other articles on how to make money run after you.
Mark So is a fervent businessman, forex trader and educator. He is the Chairman and CEO of Businessmaker Academy – a business, finance and corporate training center. He is also the Founder and Chief Forex Trainer of Forex Club Manila and Forex Club Asia. A sought after speaker for business and forex, he is inviting you to attend his two-hour orientation on forex trading this month. To register for this, please call (632) 6874645. You may email your comments and questions to firstname.lastname@example.org.