III.12. Averaging (martingale): advantages and disadvantages.

Averaging is a very controversial strategy and it is most likely not recommended to use it except in a number of situations. It consists in increasing the position in the Long as the price falls, counting on its further growth. On the one hand, this tactic killed the accounts of a bunch of traders around the world, because it led to bankruptcy with a further drop in prices for many years. On the other hand, this is the tactic used by large capital when gaining a position in a falling market. The strategy is useful precisely in a falling market during the years of crises and can bring significant income if you have calculated everything correctly and have a large capital. Figure 108 shows a situation in which martingale would give good results, given the uncertainty of the development of the further situation.

Fig.108. Gazprom JSC share from May 2008 to March 2012

That is, if the shares of a very strong company fall very much for a long time, this is a good reason to apply a martingale with a payback period of 5 years for the project. It is also worth considering that the shares still have dividends that will cover part of your losses generated at the moment.

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