Trading risk mitigation techniques

For a stable income in the forex market, a number of conditions are required. In addition to knowledge and experience, a trader must 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 in the end can bring losses to the trader. This happens if no attention has been paid to the size of trade orders. Large volume trades pose a threat to the deposit. And opening an order with a very small volume will not allow a trader to make money. The profit will be negligible. Therefore, for successful trading, it is necessary to have the skills to calculate the size of a trading position. This will prevent unnecessarily large losses. Risk reduction techniques, which I will tell you about today, will help solve this problem. They can be divided into two types: fixed interest and fixed amount.

Fixed percentage

Fixed percentage

This method of limiting losses is perhaps the most popular. The trader determines the size of the trade as a percentage of the deposit. In order to understand what this is about, consider an example. Let’s say the deposit in the trading account is $ 20,000. A trader is ready to risk in each transaction no more than 3% of the deposit amount, that is, $ 600. The stop loss will be set at a distance of 30 pips from the opening price of the trade order. This means that in order for possible losses not to exceed $ 600, the transaction volume must be $ 20 (600: 30). If the order is closed with a profit, then the next deal can be opened with a larger volume, since the amount of the deposit has increased. In other words, we always calculate the trade size based on the current amount on the trading account and the risk percentage that we have set for ourselves.

Fixed amount

Risk reduction techniquesmay 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 is willing to lose $ 200 on a trade. At the same time, the size of the stop loss is 40 points. In order to ensure that this limit is met, a trade order must be opened with a volume of $ 5 (200: 40). I would like to point out that this method has disadvantages. The most significant of them is the absence of a link to the size of the trading account. If the situation develops so that several transactions in a row will be closed with a loss, this will lead to a tangible decrease in the amount of funds on the trading account. Further trading at a fixed amount is associated with increased risks. The trader needs to change it. According to a proven recommendation,

The methods of risk reduction in trading, which I told you about today, have proven to be effective. Which one to choose is up to you. But I would recommend using a fixed percentage.