Averaging In – Trading Exercise #4

In this exercise you are going to build a position by averaging in. What this means is that you are getting long or short using multiple orders, and your average entry price may change with each fill.

Averaging In Trading Drill Goal

The game here is to build a 10 lot position in the market using just 2 lot clips, without going offside (showing an average loss) by more than 1 tick on your average position. You are just scaling in, using your read on the price action and order flow to build a position on the bid (or offer) in small increments, even if short term momentum is in the opposite direction to your position

Imagine you are a very large trader that wishes to accumulate a 10000 contract long position without moving the market against yourself. You instead use the short term momentum to get long while sellers are still selling, building a bigger and bigger position at an average price. The caviar is that if you get it wrong and average a loser, you will probably have to bail (‘puke’) out of your large position and that can get ugly.

After gaining enough experiencing trading with the DOM and seeing the market auction process first hand you can see this game play out over and over again as large positions get trapped and have to puke their position as the market runs away against them. You also hope to see where the successful large traders are averaging in so you can tag along for the ride.

This exercise will teach you how this game is played and provide a small taste of the power of averaging in to defend your bias, and the risk.

Some points for this Trading Exercise:

  • Only work one incremental order at a time so you are continually focused on short term order flow (no resting orders at different prices)
  • Build your positions on the short and long side throughout the session
  • Try averaging out of your position to maximize a profitable position
  • Increase your maximum position size if you are finding it too easy
  • Hit out if your average position goes offside by more than 1 tick

This exercise forces you to pay attention to short term momentum and order flow again, particularly at the inside market. You will need to time your positions so you are not ‘puking out’ all the time. Try playing each short term swing of the market you observe. Perform this exercise for at least one or two trading sessions. It can be a good refresher exercise if you find you are consistently missing out on moves or hesitant to pull the trigger on trades.


Trading Exercise #5 – Try and Lose


Trading Exercise #3 – Always in the Market

Trading Exercise #2 – Flip a Coin

Trading Exercise #1 – Trading Naked

 – Preparation for Trading Exercises

– Introduction to Prop Shop Trading Exercises