Not only choosing right direction favors your trade as forex trader but also choosing an appropriate position sizing strategy can increase chances of success. Because of the success it guarantees, many exchange traders advise to take special care of selecting correct position sizing method that should be devised on basis of your trading portfolio amount. If you follow position sizing strategy you will be saved from many potential losses that are difficult to be recovered.
The Need for Position Sizing Strategies
For an efficient management plan for trade, position sizing is a necessary part. The experienced forex traders mostly have good idea about the risks that appear to them while trading. Therefore, they will always try their best to minimize the risks and avoid risks which are outside their bounds of spending money.
You can increase position size with increase in growth of account as it does not make any difference to the risk level. Furthermore, in unstable markets if you keep the position size low you can reduce much of the expected risks. In the same way, in stable markets you can keep the position size high to reduce risks and get more profits.
Comparison of Position Sizing and Gambling
Forex trading is used more for gambling than just for investment. Therefore, the forex traders can learn the perfect position sizing methods from the most successful traders. An example of such strategies can be to reduce position size if your account has gone through losses and increase it vice versa.
This is just like in gambling when in shooting craps, bet amount is increased when luck is not favoring the house and reduced when luck seems to be favoring the house. Another such example is that whenever the trade you are a part of has more odds of success you should increase the position size. This is just like gamblers do by increasing bet when they have a hand with more odds of winning in a poker game.
Using Leverage Sensibly
Most of the forex traders leverage to a ratio of 500:1 the margin deposits with other forex brokers. This is because in forex trade, assets with equal value initially are exchanged. In U.S maximum ratio for leverage is 20:1 for minors and 50:1 for majors. In other words, it means that if the margin deposit is $1000 you can manage a position size of up to $500,000. However, such high leverage not just provides advantages, it also increases risks.
The more leverage ratio a forex trader can manage the more odds are of getting the high profits. There is just one small drawback, the risks are increased significantly and this means that the business can face big losses in small time span. The solution to this problem is that you should use this high leverage with a fixed maximum limit of loss. This way you can reduce your risks significantly. However, the skilled forex traders have a preference of keeping leverage ratio as low as they can to reduce the odds of losses they may face and reducing the risk for money.