Forex Blog

First-hand Forex trading experience and information about foreign exchange market that will be useful to traders

Archives

Weighing Risk in Forex Positions

September 6, 2010 by

When opening a Forex position it’s very important to consider your own maximum risk tolerance, which usually depends on the account size and the stop-loss of the said position. Risking only a small fixed fraction of your account balance is a nice way to limit your losses and to organize the whole trading process. But there is also another risk factor that’s often overlooked by the traders and is rarely used when opening a new position — a risk of trade (or its success probability).

A risk of trade can be measured as the expected success rate of the position. For example, if you saw Fed raising interest rate unexpectedly it’s almost a surefire bet (with about 90% probability) that the USD will go up at least slightly. Position based on this signal can be characterized as the low-risk one. And if (for example) usually you risk about 1% of your capital per each trade, for this position you could increase its size to risk, let’s say, 2%. For the opposite example, let’s presume that you are trying out some new Forex signal service and consider that relying on it is quite risky. So, the usual 1% of the initial capital risk can be reduced to 0.5%.

The problem with this risk of success is that it’s very subjective and there is no good way to measure it precisely. A trader would need to rely on his experience and intuition to weigh the risk into his positions. But some approximate system of risk weighing can be organized even by rather new Forex traders and the result of its implementation would be quite nice.

So, next time when you see a nice signal and go to some position size calculator (or even if you do it manually), consider evaluating a probability of trade’s success and alter the position size accordingly.

If you have any comments on weighing the risk in Forex positions, please, reply using the form below.

One Response to “Weighing Risk in Forex Positions”

  1. Rick

    Another thing you can do is close part of your position if a trade does not perform as you expected. For example, if you enter a position with 1 lot, you can close, say 0.6 lot and leave the remaining 0.4 lot open. This can protect your profits or minimise your losses.

    Reply

Leave a Reply

required
required (will not be published)