By: Terry Allen
Under stable market conditions, placing a 2 lot position, whilst seeking a profit of 50 pips, may be an acceptable action should the size of your account support it. However, during more volatile times when potential losses could be as large as 100-200 pips or more, this strategy ceases to be so attractive as its begins to offer deteriorating risk to reward ratios. Under such circumstances, you need to take corrective actions in order to reduce your potential loss exposure such as reducing the lot size of your trading positions.
Traders should always follow their predetermined trading strategy
regardless of the market conditions. During volatile times, you should enforce this principle even more as well as understanding the importance of using increased levels of restraint. As the pressure on you intensifies with increasing volatility, you must attempt to adhere to the key features of your Forex trading strategy such as its activated stops, contingency plans and risk management benchmarks without hesitation. This will help you to define your levels of risk should price action become more unpredictable. Without strict discipline and self-control, losses can be very significant during volatile times to the point that your entire budget could come under threat.
For instance, you may be hesitant to use tighter stops in volatile markets because of the increased chances of your positions being stopped out as a result of the violent price action. However, employing tighter stops can provide you with a great risk management strategy under these conditions.
For example, consider that you have decided to activate a long EURUSD trade. If price action is erratic, then instead of setting an 80 pip stop to protect your position, consider placing only a 50-60 pip stop. This action will insure a reasonable level of protection for your position. However and if your position is stopped-out, there is a strong possibility that the market will descend even lower during volatile times. Hence, you would have reduced your risk exposure by selecting a smaller stop size.
One type of event that can produce violent price movements, even during stable times, is caused by large corporations or governments that have substantial budgets at their disposal that may well exceed billions of dollars. These organizations can generate, just on their own, very large movements in currency pairs (spikes) by the sheer size of their transactions and can do so without warning to the rest of the market. You need to be aware of such activity when calculating the risk to reward ratios for all your trades.
This article is part of a course intended to show you how to develop your own successful Forex Trading System.
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FX BONUSES & PROMOTIONS
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Live Rates
| Symbol | Change | High | Low |
|---|
| EUR/USD | -0.0003 | 1.3283 | 1.3202 |
|---|---|---|---|
| AUD/USD | 0.0043 | 1.0777 | 1.0684 |
| EUR/GBP | -0.0003 | 0.8401 | 0.8368 |
| EUR/JPY | -0.17 | 103.17 | 102.28 |
| GBP/USD | 0 | 1.5826 | 1.5761 |
| USD/CAD | -0.001 | 1.0015 | 0.9975 |
| USD/CHF | 0 | 0.9159 | 0.9106 |
| USD/JPY | -0.08 | 77.77 | 77.41 |
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