Signs That Averaging into a Trade Is Not a Good Idea

Many trading books recommend avoiding or adding to a losing position average – and for good reason. This tactic can result in significantly higher losses on smaller incremental price moves. Also, if you add to a losing position, you lose the current trend movement. In other words, you not only lose money, but you also don’t make money, which is the opportunity cost of averaging.
But that still doesn’t stop people from getting into losing averages, even professional traders. Here are some clues that averaging is probably not a good idea:
The market just blew through your stop loss level. But you didn’t have a stop loss order, so I still stuck to the losing position. Tactical Mistake #1: Trading without an active stop loss order.
Tactical Mistake Two: Instead of exiting the position in line with your trading plan, you are reluctant to take a bigger loss than you initially expected, so you decide to hold the position in the hope that it will recover.
This is usually the first wipe down the slippery slope to part with a trading system. Save yourself some money and don’t make a third tactical mistake by averaging into a larger position (which you had already planned to get rid of by that point anyway).
The range just broke. You may have had great success in recent trades playing a range bound market, and you are in position again based on that range. But the bands break, and prices move to new levels. Remember the basis of your trade – the range will hold – and do not comment, let alone add, to positions that exceed a pre-set stop-loss level based on the range.

The news is out, but the currency pair is not responding the way it should. The news or data may be positive for the US dollar, for example, but the dollar is under selling pressure anyway.
Keep in mind that many cross currents are at work at any given moment in the forex market. Sometimes they are tied to the position (a large hedge fund may shift around a multi-billion dollar position); Other times it is based on news or information that is not widely known in the market, such as a merger and acquisition (M&A) deal or rumor.
The market reaction to the news/data report is more important than the report itself. If you’ve taken a position based on the news, feel free to guess the market’s reaction by adding to the position if the market isn’t responding the way you think the data indicates. Instead, accept that something else is happening and the news your trading is built on is not.