It is a well established fact in the forex market that every trader needs to focus on surviving before he can think about making a lot of money. This is why there is so much focus on risk management and capital preservation forex trading strategies in the forex market.
Most traders have to choose between simple position sizing forex trading strategies and their complex variants. Moreover, most traders are inclined towards the more complex strategies because they allow the position sizes to be fine-tuned.
If you have also decided to use advanced position sizing strategies i.e. the use of risk and stop loss placements, then you must be sure of your choice. The only way this is possible is for you to learn about their pros and cons. Consider the following.
What Are The Pros?
The fact that using these advanced position sizing forex trading strategies is beneficial cannot be denied. The biggest and the most obvious benefit is that such strategies take into account trade risk i.e. risk in every trade. The process is extremely effective because it allows the individual position sizes to change on the basis of the trader’s performance.
For instance, if you were to do well in the market and increase your account size, then your position sizes would increase in proportion to your account which would increase your profit potential. Similarly, when the account starts contracting so do your position sizes, which minimises how much you expose your account to risks in the market.
The profit that you can get by using such advanced position sizing forex trading strategies is geometric in nature. This means that your account will see compounded or geometrical growth over a period of time. Enough good wins will see your account equity double or even triple in a small amount of time.
Furthermore, while the growth of your account is swift and significant with the use of such strategies, its contraction is slowed down as well. In other words, by using such strategies you would be preventing quick and sudden wipe-outs that many traders experience in their careers.
Understanding The Cons
Even so, there are some cons to using these strategies that you must take into account as well. The most obvious is that when you use such forex trading strategies to determine your position sizes you make it difficult for yourself to recoup any money you lose in the market because your positions get progressively smaller with every loss.
Also, these types of strategies are not really suited for small accounts because the position sizes that they yield will be too small to make any considerable difference to the account. Moreover, sometimes if the account is too small then the lot size determined through them ends up being smaller than the smallest lot that the trader can trade in.
Finally, an expansively large account will also have trouble with these forex trading strategies because they will give position sizes that would be unrealistic for the market.