Forex Essentials
Apr 22, 2024

What is FX Averaging (Nanpin)?

Explain in detail what Averaging (Nanpin) is, its advantages, disadvantages and the precautions

For those who are concerned about their own skills and experience in forex trading, FX Averaging, Nanpin may be an interesting strategy. This article will explain in detail what Nanpin is, its advantages and disadvantages, and the precautions you should know about it.

First of all, Nanpin, averaging down, is a trading technique to deal with market reversals. If the original trade recovers, it may be possible to make up the loss. While it has the advantage of maximizing profits while minimizing risk, there are also disadvantages and caveats.

This article will give you the know-how to maximize your profits while managing risk. You will also be able to properly understand the disadvantages of Nanpin and avoid excessive Nanpin and unplanned trading.

First, let's look at the mechanics and use of Nanpin.

What is FX Nanpin?

Nanpin is one of the most notable trading strategies in forex trading. It is a method of supplementing an original trade by adding a new position when the market movement reverses from expectations and is known as a way to help manage risk.

In Chinese characters, it is written as "難平", which means to flatten a difficulty, or "to average a loss".

Nanpin is a favorite strategy of even the most seasoned traders. Understanding Nanpin is essential to improving your trading skills and increasing your profits while minimizing risk.

Let's take a look at the process and use of Nanpin.

Nanpin Flow (when holding a long position)

1. Predicting an upswing, buy entry

2. The market went down against predictions

3. Reduce the average purchase price by Nanpin

How to use nan-pinning

Step1. Predicting an upswing, buy entry

Assume that you forecast a rise in USD/JPY and enter the market under the following conditions.

1 USD Yen = 105 Yen

Trading volume = US$10,000

New buy order

Step2. The market went down against predictions

Contrary to our prediction, the price fell to 1 USD/JPY = 100 yen. 

At this point, the unrealized loss on the position is 50,000 yen.

Step3. Reduce the average purchase price by Nanpin

When the price falls to 95 yen per U.S. dollar = 95 yen per U.S. dollar, the company will buy an additional 10,000 U.S. dollars.

This will lower the average acquisition price to 100 yen per dollar.

(US$10,000 x 105 yen + US$10,000 x 95 yen) / US$20,000 = 100 yen

Advantages of FX Nanpin

In forex trading, the tactic of Nanpin is gaining attention by many traders and investors. So why is Nanpin gaining popularity? In this section, we will focus on the benefits of Nanpin and discuss them in detail.

In conclusion, the greatest advantage of Nanpin is that it minimizes losses even when the market moves in the opposite direction of expectations. By taking a new position against the original trade, the Nanpin strategy has the advantage of making it easier to recover losses if the market turns again.

The following is a detailed explanation of the benefits of Nanpin.

1. Loss averaging

One of the major advantages of Nanpin is that it can lower the average acquisition price of a position.

For example, if one U.S. dollar drops from 100 yen to 90 yen, under normal circumstances, the unrealized loss will not be eliminated unless the price returns to 100 yen per U.S. dollar again. Employing Nanpin in this situation allows you to make new purchases and lower the current average acquisition price.

For example, if you implement a Nanpin at 90 yen, you can lower the average acquisition price to 95 yen by combining your existing position with new purchases. Therefore, unrealized losses can be eliminated when the price rises to 95 yen.

Nanpin is a profitable method used as a means of loss averaging and effective risk management.

2. Profit maximization

The advantage of Nanpin is not only to eliminate unrealized losses, but also to maximize profits.

Usually, in investments such as currency trading, unrealized losses occur when prices fall below the point of purchase. In such cases, unrealized losses can be eliminated by employing "Nan-Pin". If you continue to hold on to your position after the unrealized losses are eliminated, you will be able to increase your profits significantly.

By using Nanpin, profits can be maximized when prices exceed the average purchase rate. By taking advantage of market volatility and taking advantage of profit margin situations, opportunities for large profits can arise.

3. Flexibility and Adaptability

The advantage of Nanpin is that it increases loss flexibility and the adaptability of trading strategies.

Effective use of Nanpin allows for a more flexible approach to positions held. You can lock in profits when prices rise, and trade at non-traditional stop-losses when prices fall.

It will improve your skills to be flexible and adaptable to market fluctuations, not limited to specific trading methods.

Furthermore, by employing Nanpin, there is no need to wait for the price to return to the initial order price in the event of a reverse price movement. This is very beneficial in terms of trading flexibility and risk management. For example, when combined with the martingale method (i.e., increasing lots as your positions increase), you can implement a profit-seeking strategy while adjusting your price range after a price reversal.

Nanpin is important as a technique that increases flexibility in position management and the trader's ability to respond to market fluctuations.

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Disadvantages of FX Nanpin

While Nanpin is regarded by some as an effective method for responding to market reversals, it also has its drawbacks. This section focuses on the disadvantages of Nanpin and discusses some of the risks and issues to be aware of.

In conclusion, the biggest disadvantage of Nanpin is the risk of increased losses if the market continues to move in the opposite direction. It is important to understand that a Nanpin strategy takes multiple additional positions when the market forecast is off, so the losses may be greater than the original transaction.

Let's take a closer look at the disadvantages of Nanpin.

1. Risk of increased losses

It is important to understand that a cautionary note about the Nanpin strategy is that if the exchange rate moves in the opposite direction, your losses may be magnified. This is because each time you nan-pin, you increase your position holdings. We will illustrate this with a specific example.

For example, suppose you initially trade $1,000. However, the exchange rate unexpectedly goes in the opposite direction, resulting in a loss. If you decide to repeat the Nanpin in this situation, the amount of positions you hold will increase and the possibility of further losses will increase. If you were to take a $10,000 position, your losses would grow at a rate more than ten times faster than your initial $1,000.

In such a situation, it is important to control risk appropriately because a Nanpin strategy may conversely result in increased losses. By setting a planned risk tolerance and clarifying the point at which to cut losses, it is necessary to execute a Nanpin strategy while minimizing losses. The key issue is to balance risk and return and to proceed with trading.

Counter-measure

Under these circumstances, risk management is critical. It is important to set an appropriate risk tolerance according to market fluctuations and consider ways to minimize losses. However, please note that there are many cases in which investors are in a hurry to eliminate unrealized losses quickly, and end up with a loss. Instead of mechanically Nanpin in 1 yen increments, etc., be conscious of Nanpin at the turning point when you have analyzed the market and determined that the price has fallen to the bottom. By avoiding the influence of emotions and trading in a planned and calm manner, the risk of increased losses can be reduced.

2. Vulnerability to trend reversal

The market that is not compatible with Nanpin is a "trending market. A trend market is a market where the chart is moving in one direction. For example, in 2022, the dollar-yen exchange rate continued to trend upward to about 151 yen in the direction of the dollar's appreciation against the yen's depreciation. In such a one-way trend market, it is not a good idea to keep moving in the opposite direction.

A trend reversal is a temporary change in the market, which can be a precursor to a change in trend direction. However, trend reversals are difficult to predict and require early decisions. Nanpin is likely to increase risk and should be carefully considered. To reduce vulnerability to trend reversals, it is important to use technical and fundamental analysis to accurately predict market trends and build strategies based on these predictions.

Counter-measure

A good match for Nanpin is a "range market". A range market refers to a market where the chart moves up and down within a certain price range. By utilizing Nanpin in a range market, a different approach is required than in a trending market. If you do some more pinning when a range market is formed, there is a high probability that the chart will return to its original position.

When considering a Nanpin strategy within a range market, it is important to watch for signs of a turnaround. Price reversals can occur when prices within a range approach the upper or lower end of the range. By waiting for such a turnaround point and then doing some more pinning, you will be able to identify more favorable entry points.

3. Need for additional funds

Note that the Nanpin strategy requires a large amount of capital to increase the position. Consider the need for additional funds. While Nanpin is a technique of increasing positions in a market that is going in the opposite direction, one of its disadvantages is that it requires an abundance of funds to do so.

If you do not have sufficient funds, you may run out of funds while doing some more Nanpin. In this situation, you may run out of margin, leaving no room for further Nanpin. This is a factor that increases risk, so systematic risk management is essential.

It is important to recognize the need for additional funds and to ensure that sufficient funds are available at the time of investment. Even when funds are limited, it is important to develop a strategy to minimize risk while still allowing the trade to proceed. Ensure that you manage your funds by setting appropriate position sizes and having rules for limiting losses.

In order to avoid running short of funds, additional funds must be planned for, and the necessary funds must be set aside for a Nanpin strategy.

Counter-measure

  • Limit on the number of times of Nanpin

The number of times you can do this depends on your risk tolerance and trading strategy.

Doing a lot of napping increases the likelihood of incurring large losses if the market moves in the complete opposite direction. Therefore, it is important to control risk and keep positions balanced by limiting the number of times in advance.

When limiting the number of times you can pick up pins, it is important to have a good understanding of market trends and volatility, and to use technical and fundamental analysis as a basis for making trading decisions.

In addition, limiting the number of times you nan-pin will allow you to make more calm decisions and to proceed with your trades without being influenced by emotions.

  • Adjustment of position size

Adjusting position size is an important factor. Based on your risk tolerance, you must decide how much risk you are willing to take. Properly adjusting your position size will help you utilize your funds effectively and protect your capital.

Calculating the appropriate position size involves consideration of your margin balance, your risk tolerance, and the volatility of the currency pair you are trading. To minimize risk, a certain percentage of margin (e.g., 1-2%) is generally invested in a single trade. This reduces the risk of incurring large losses and increases the sustainability of the trade over time.

  • Volatility considerations

It is important to understand and properly account for market volatility.

Volatility indicates the degree of price fluctuation, and currency pairs with high volatility are more likely to experience large price changes.

In currency pairs with high volatility, risk is increased and position size should be adjusted appropriately. It is also important to take into account factors that affect the market, such as the time of day to trade and the release of economic indicators.

On the other hand, currency pairs with lower volatility tend to have lower profits, but also lower risk.

Volatility considerations will help you understand your risk and adjust your position size. Understanding market movements and developing appropriate strategies will improve the probability of successful trades.

Cautions on FX Nanpin

While the tactic of Nanpin is useful for risk management in forex trading, there are also some points to be aware of. This section focuses on the important precautions to take when practising Nanpin and provides detailed information on how to trade safely.

The most important thing to keep in mind is to avoid excessive greasing and unplanned additional position taking. In other words, it is important to understand market movements and carefully judge the timing of additional trades and position sizes. It is also important to understand the potential for losses.

We will explain the cautions one by one.

Do not engage in excessive Nanpin.

In a Nanpin force, excessive Nanpin is a caution that should be carefully considered. Repeatedly Nanpin requires more margin for existing open positions and reduces the margin available to take on new positions.

Excessive Nanpin can increase the risk of increased losses. Adding too many positions by Nanpin can lead to further losses by going against the trend in one direction. Under these circumstances, it can be difficult to achieve the original objective of the trade, which is to make a profit.

A Nanpin strategy requires proper timing and risk management. Excessive Nanpin may result in ignoring market trends and one's own risk tolerance, which in turn may result in increased losses. In order to trade systematically, it is important to carefully determine the number of times and width of your pick-and-pin strategy and to maintain calm judgement.

Avoid unplanned acquisition of additional positions

To properly execute a Nanpin strategy, it is important to avoid taking additional positions unplanned. Nanpin is a method of acquiring additional positions against positions that have incurred unrealized losses, but there is a tendency to get carried away by emotion and take positions unreasonably at this time.

In particular, unplanned Nanpin in a mentally unfavorable situation or in a hurry can result in a rapid decrease in funds and an increased likelihood of being cut off from losses. Unplanned Nanpin is a risk-increasing factor, and actions that lack calm judgement can result in increased losses.

A well-planned approach is essential to building an appropriate pick-and-pin strategy. It is important to correctly understand market fluctuations and market characteristics, and to make calm decisions without being influenced by emotions. Increasing positions through Nanpin should be considered based on prior research and technical analysis, and should be done at the appropriate points.

Understand the potential for loss (useful for keeping mentality in the event of a loss)

When employing a Nanpin strategy, it is important to fully understand the potential for loss.

Because Nanpin has the potential to spread losses, it is necessary to recognize the importance of loss prevention in order to maintain one's spirit when losses occur. Here are some considerations to keep in mind as you proceed with your trades while minimizing losses.

In a Nanpin strategy, the risk of large losses exists. Therefore, it is important to determine the stop-loss position in advance before entry. By setting the trade rationale and acceptable loss amount in advance, you can make calm decisions. By setting such rules, you will be able to trade with mental stability.

It is important to have specific criteria for the initial entry, such as "stop-loss at the position where the basis breaks down. It is also beneficial to set a certain percentage of losses that you are willing to tolerate per trade. This allows you to have rules that match your own risk tolerance when making trades and allow you to proceed with your trading without being swayed by emotions.

By understanding the potential for losses and recognizing the importance of stop-losses, you will be able to more effectively manage your Nanpin strategy.

Utilizing Nanpin with ThreeTrader

In trading, the Nanpin strategy is an excellent tactic for dealing with market volatility.

We offer an ideal trading environment for traders who utilize this strategy.

For example, in the RAW account, the dollar-yen spread is extremely narrow, ranging from 0 to 0.2 pips (variable), which makes the success of a no-pin strategy even more likely.

Here we will show you the benefits through specific calculations.

As an example of the application of a Nanpin strategy, consider a dollar-yen pair with a spread of 0.1 pips.

Initial position: Start trading with 1 lot (0.1 pips spread)

As the price moved in the opposite direction, the position was added with a Nanpin:

Second position: added in 1 lot (0.1 pips spread)

Third position: added in 1 lot (0.1 pips spread)

Thus, extremely narrow spreads are also applied when taking additional positions using a Nanpin strategy. These minute costs are the factors that support a Nanpin strategy.

Successful Nanpin strategies require the right environment. Our low spreads provide the ideal environment. You can trade with minimal risk while taking advantage of finer price movements.

To maximize the advantages of your Nanpin strategy, our advanced trading environment will help you improve your trading efficiency and maximize your profits. We invite you to take advantage of our trading platform.

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Summary|FX Nanpin

Nanpin is a forex trading technique that responds to market reversals and is a strategy of taking a new position in addition to the original trade. This technique has the potential to maximize profits while minimizing the risk of loss.

The first advantage is loss averaging. In the event of a market reversal, the loss from the original trade can be supplemented by adding a new trade. In addition, the Nanpin method is particularly effective when the trend moves in one direction for a sustained period of time. The flexibility to respond to market trends allows you to maximize profits.

Disadvantages, however, include the risk of increased losses and vulnerability to trend reversals. Adding a new position when the market reverses carries the risk of a sudden increase in losses, so careful risk management is necessary. It is also important to note that there should be a limit to the number of times one can Nanpin and that it is difficult to make appropriate decisions.

When practising Nanpin, careful planning and trading strategies are required to take advantage of the advantages and overcome the disadvantages. Consider the precautions to minimize the risk of loss and maximize profits by using Nanpin.