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When More Risk Is Too Much in Forex?

December 22, 2014 by

According to one of my old polls, the majority of active FX traders prefers to risk no more than 5% of their balance on one trade. I personally, prefer my risk per trade to be near 1%-2%. But how should we, as traders, act when a new opportunity arises and we already have an open position with our risk limit hit? Should we use the opportunity and double our potential risk? How many positions should we tolerate with this logic? Should we treat positions on negatively correlated currency pairs differently from those we open for the same currency pair or for the currency pairs with high positive correlation?

Experienced traders usually define some portfolio risk, which they set as the maximum limit of risk per balance (or per equity) across all simultaneously open positions. The concept is pretty obvious, but it lacks the answer to the initial question. For example, if we define our per trade risk as 2% and portfolio risk as 10%, and then open 5 positions for 2% risk each we will stumble upon a dilemma when the next (6th) trading signal arrives. Should we skip it or should we open a new trade? If we open a trade, should we go full 2% on it or decrease the risk to 1%? Or should we partially close some of the earlier positions to arrive at 6 positions — all with the same risk?

Portfolio Risk Calculation Example

I do not have a strict value of my own portfolio risk limit. For positions on the same currency pair, it is usually no more than 5%. For positions on several uncorrelated currency pairs, it can easily be as high as 30%. And how about you?

How do you treat your total portfolio risk vs. single trade risk?

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If you have some interesting comments or questions on dealing with the total portfolio risk in Forex trading, please use the commentary form below to post them.

2 Responses to “When More Risk Is Too Much in Forex?”

  1. Santiago

    It depends on your strategy. It doesn´t matter if there are different positions open, though each position is autonomus from others and are treated meticulously. Variables affect differently and your assuming different risks. Portfolio risk on forex comes down to how many positions can I open at once and taking all the possible opportunities in your analysis, but each of them have different expectancies, and as long as you respect your risk limit on each one trade, you have controled your portfolio riks. As per correlation, if you are trading curriencies with 90 – 100 correlation and -90 – 100 inverse correlation, then you are doubling your risk on 1 analysis though taking both positions would bring the same expected return and therfore that would be doubling your risk with 2 positions that are to behave equally.


    Andriy Moraru Reply:

    So, do I understand it right from your comment that we should not worry about the total portfolio risk if each position has a controlled risk and there is no or very little correlation between those positions?


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