In a runaway forex trend, take care of your average entry price
Average entry price aka centre of gravity
Everyone knows that when centre of gravity is too high, a structure topples over. Visualise a double decker bus with every passenger sitting on level two and no one on level one! This is the same as trading. When a trader keeps stacking a winning trade with new positions, the average entry price goes up (long) or goes down (short). This means that even a small retracement could quickly turn a stack of winning trades into a loss. I have a good example here ‘Losing on WTI winning trade: stop loss management mistakes‘.
As background reading, I covered the concept of average entry price aka centre of gravity in these postings before:
- Adding to a winning trade: forex position sizing and risk profile
- ‘Diamond-shaped’ position sizing strategy for currency trading
Mistakes dealing with average entry price result in this common feedback:
I had this streak of winning trades, 7 weeks, 8 weeks, 9 weeks but in the 10th week I lost everything. Why? Because after each win, my position size got bigger. A slight retracement eliminated the entire gain.
Secret to a winning forex account: entry level and position sizing
- Make sure stop loss levels take into consideration the risk of the entire winning position as well as individual entry levels.
- A common mistake is to suddenly enter huge positions even when a trade is reaching its final target profit. In such cases, typically SL is set very far away yet TP is very near. Not only does the risk reward ratio suddenly not make sense at all, the entire stack of winning trades suddenly turn into a loss with a little retracement only.
Our demo forex trading account Hantamfx™ is doing very well. It turned $100k equity into $181k today from 20 January 2015. These two charts I share below are very important demonstration of why Hantamfx™ is doing very well.
Even as the price of EURUSD and GBPUSD goes parabolic, we have refrained from continuously stacking on positions. Labels ‘S’ in blue shows entry levels. Note the absence of entries at the right hand corner as price runs away.
This may have diminished our chance to maximise profits but it has let us retain a higher average entry price or CG, remain cool and able to deal with retracement (96 pips with GBPUSD and 86 pips with EURUSD).
As traders become more sophisticated with a higher level of correction trades, managing position sizing, re-entry and average entry price becomes more important. It is even more urgent as price runs away so that the winning trader becomes pre-occupied with profit maximisation but forgets psychology and risk management.