Chapter 1: Introduction To Averaging

Introduction

Every trader wants be to on the winning side of the game i.e. buy low and sell high or sell high and then buy lower. However, the volatility in the stock market makes it extremely difficult for a trader to execute this on a consistent basis. Some positions may not take place as desired for a trader. One strategy that a trader could consider in order to overcome volatility is averaging his positions.

Averaging is not restricted to losing trades alone, it works both in rising and falling markets. In a rising bull market, the cost of new unit acquired reduces due to averaging, wherein the holding is increased incrementally backed by strong fundamental factors like consistent revenue growth, increase in PAT, etc. While in a falling market, averaging reduces the cost of loss-making units purchased at higher prices.

In this section, we will learn about the various averaging strategies a trader can consider in different market environments for different market products.