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Trade Diversification and Risk Management Strategies

Trade Diversification and Risk Management Strategies

Despite that diversification is considered as one way to limit your risk exposure in Forex trading, you should remember that it can be overdone in some cases. If your trades are diverted in many different trading currency pairs at the same time, the few profitable trades may be diluted by the large number of your losing trades. This creates a trade-off and you should find a balance. Some may concentrate in specific currency pairs which is fine as long as the pairs are trending when they trade. So you should employ a negative correlation between your currency pairs. The more negative your correlation is between your currency pairs the more diversification you can achieve.

Using Stop Losses Strategy

The use of Stop Losses is one of the crucial strategies in money management. You need to combine technical factors on your charts along with money management considerations. You should always take into account the market’s volatility. When you have more volatility in the market you must loosen the stop losses. So stop losses that are placed too close, in order to protect your losses from your losing trades, may result in unwanted trades closures on a short term market swings. On the other hand, stop losses that are employed too far away may avoid unwanted closures but they may result in larger losses. The trick is to find the right balance between the two.

Reward to Risk Ratios Strategy

Considering that you will open a number of different positions in the market, you should expect that some of those trades may end up as losing trades which is very normal. In order to come ahead on this, you need to ensure and calculate that the profit amount of your winning trades is greater than the losing amount of the losing trades. In order to accomplish this, you need to use a reward to risk ratio. So for each potential trade you should determine a profit objective. This profit objective is balanced then against the potential loss if the trade goes wrong. Some traders use a 3 to 1 reward to risk ratio meaning that the profit potential must be at least three times the possible loss if a trade is to be considered.

Large profits from trades are achieved when you stay with persistent trends. Only some of your trades during the course of a year will generate large profits so it is necessary to maximize those few big winners. Letting profits run is the way that you can increase your profits and on the other side to keep losing trades as small as possible.

Trading Multiple Positions’ Strategy

However it is not easy to let your profits run. In a market that is trending and you produce large profits in a relatively small period of time, you can experience a sudden change. Your oscillators show an overbought or an oversold situation and there is a support or a resistance visible on your chart that is opposite to your current open positions. Should you take your profits and exit the market?

To avoid this you need to always trade in multiple trades. You can divide your trades to trading and trending positions. You use the trending positions for the long run and you use loose stop losses so you can give the market room to consolidate. In general lines, these are the positions that produce the largest profits.

The trading positions are for the short run. When the market reaches your first objective and is near a resistance or support always according to your positions direction you can exit the market quickly. For such orders, you should use a tight stop loss. The goal here is to protect your profits and the increased flexibility from the said strategy makes a big difference in your overall trading profits or losses.

After Periods of Success and Adversity Strategy

Now you need to consider what’s next when your positions are closed. What will you do when the equity suddenly drops down to 50%? On the other side, what do you support to do after you close your winnings? Let’s assume you double your money. Are you going to double as well your exposure in the market? Then another dilemma comes in place. What would happen if a losing period follows and end up losing all your trading profits?

You need to consider your performance record as a chart. You will experience peaks and troughs however; the trend of your performance should be pointing upward. The best thing to do after periods of success is to not increase your trades’ volume. You should start increasing your volume when your equity falls as this increases the odds that the higher volume will be made new to the equity’s troughs instead of the peaks.