Numerous strategist creating forex strategies will tell you that a per cent loss concept is the best out there. You decide how much you are willing to lose for each trade you make and then plan accordingly. Yet, there are some fallacies with such a strategy. The pros and cons of this concept will be examined below. The idea is to let you know what exists, so you know what you can do in the future when you are finally at a point to trade. Starting with learning strategies and figuring you know everything you need to is another mistake often made. If you have yet to read about the history, fundamentals and technical analysis do not start trading even with this strategy.
Pros of the Per Cent Loss Forex Strategies
Per cent loss is a concept in which you assign each trade a certain percentage. For instance you might be fine with 3% loss on all trades. Another person might approve of the 10% loss for all trades. The percentage chosen is based on your comfort zone and the loss you can make up. Forex strategies concentrating only on percent loss are narrow of focus.
The pro of this concept is you know exactly what you are going to lose each time you enter a trade. You have made the calculations and put in a stop-loss to ensure it is only that percentage amount.
Since you are using stop-losses with a percentage you have also ensured the stop-loss is not too tight with the current rate. Forex strategies using stop losses are very helpful as long as they are used right meaning you do not put a stop loss at 5 pips from the current market price. Fluctuations happen; it does not mean the market is moving against your position.
Cons of Forex Strategies on Percentages
The biggest disadvantage of per cent loss strategies is losing more on big positions than you wanted to. For example there is news indicating the AUD/USD is going to move 200 pips; you decide to put 3 contracts of 100,000 on long. You have also set your loss percentage at 10% for all trades. You calculate the stop-loss required to ensure that 10% loss is all that will occur based on the forex strategies formula. Basically you need to figure out the margin required for the trade and take 10% of that to ascertain where to put the stop-loss.
On another trade that is looking less positive you decide to put one contract of 1,000 on the trade with 10% loss. Unfortunately, you were wrong about the 3 contracts, but right about the one contract. You lost 10% for the 3 contracts and gained 20% on the one contract. Yet, in the end you still lost a lot of money due to the 10% loss on the larger trade. Forex strategies that have a narrow focus like the per cent loss will create larger losses. It is not about a specific per cent loss, but actually a focus on a certain currency amount such as you are unwilling to lose more than $500 AUD on any trade.
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