The strategy of averaging consists of buying more shares than you already own, when prices are lower.
That is to say, you bought shares, but the price in the market drops a lot and those shares you had decreased in value.
This strategy aims to increase the number of shares in your portfolio so that their unit value decreases, so that when the price goes up again it is easier to recover. But it should only be used if the price of the shares has fallen due to a correction, or something punctual like some news, NOT if it is a change of trend. It should be a correction due to temporary news from the company you bought, or situations that do not alter the trend such as news from other companies that caused the market in general to fall, for example because they have a lot of weight in the main indices.
Generally, it is used by people who do not use stop losses. Because if you use them, you would just let it touch stop. Except, you see that it won’t go that low, but you want to buy more to get out sooner or to take the opportunity to earn more by going out on your initial target.
Simple moving average trading strategy
Let’s take an example: you buy 100 shares of XX at $15 each, but after a few weeks they have dropped to $13 because of a market correction. Then, you buy 100 more shares to average the price of each one, because you consider that it is a simple correction. Also, because you did a fundamental analysis and found nothing to worry you, just as in the technical analysis you find that maybe it reached an important support where it could bounce back. Now you have 200 shares of XX at a value of u$s14 each.
Let’s suppose that after 1 month, the shares are already at u$s14.75 and you sell them:
Initial investment u$s1500+ investment to average u$s 1300= u$s2800
Closing 200 shares x u$s14,75= u$s2950
Profit: u$s2950 - u$s2800= u$s150