Forex market requires a number of conditions for stable earnings. Besides knowledge and experience, a trader should have an effective trading strategy. The rules for closing and opening trade orders are the basis of any trading system. But even if they are carefully thought out, trading can result in losses for the trader. This happens if no attention has been paid to the size of trade orders. Transactions opened in large volumes pose a threat to the deposit. And opening an order of very small volume will not allow the trader to earn money. The profit will be insignificant. Therefore, for successful trading it is necessary to have skills in calculating the size of a trading position. This will prevent unnecessary losses. The risk reduction techniques that I will be telling you about today will help to solve this problem. They can be divided into two types: fixed percentage and fixed sum.
Fixed interest
This is probably the most popular way to limit losses. A trader determines the size of a trade transaction as a percentage of the deposit. In order to understand what we’re talking about, let’s look at an example. Suppose the deposit on the trading account is $20,000. The trader is ready to risk no more than 3% of the deposit amount, i.e. 600 dollars, in each transaction. Stop-loss will be set at a distance of 30 points from the opening price of the trade order. This means that in order for possible losses not to exceed 600 dollars, the volume of the transaction should be 20 dollars (600:30). If the order is closed with a profit, the next transaction can be opened with a large volume, because the deposit amount has increased. In other words, we always calculate the size of the transaction based on the current amount in the trading account and the percentage of risk that we have set for ourselves. As the long-term practice of traders has shown, its optimal value is the range from 2 to 5 percent.
Fixed amount
Methods of risk reduction may be different. For example, a trader sets a limit on the size of the transaction not as a percentage of the deposit, but as a specific amount. Suppose he’s willing to lose $200 in the deal. The size of the stop-loss is 40 points. In order to be able to comply with this restriction, a trade order must be opened in the amount of 5 dollars (200:40). I want to point out that this method has flaws. The most important of them is the lack of binding to the size of the trading account. If the situation is such that several transactions in a row will be closed with a loss, it will lead to a significant decrease in the amount of funds on the trading account. Further trading at a fixed amount is associated with increased risks. A trader needs to change it. According to a proven recommendation, a fixed amount should be reviewed when the deposit amount is changed by 20 percent.Methods of risk reduction in trading, which I have told you about today, have proven their effectiveness. Which one of them to choose is up to you. But I’d advise you to use a fixed percentage. Fyodorov’s Inga17.09.2019