Forex Trading Library

Size DOES Matter…

When Considering Risk and Strategy!

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A phenomenon that a lot of traders notice – and you might have seen it yourself – is that when they increase the size of their trades, their strategy seems to stop working. For some, even just switching from their demo account to their live account, and using the exact same strategy, will lead to making less money. This might lead a few of them to suspect that the system is rigged, or doesn’t work for people trading larger sums.

But, there are lots of successful traders, so… What’s really going on?

The trading headspace

As traders will constantly point out, psychology is an important factor in trading because we are not machines. Even when we are following signals given by math-based indicators, there is still a bit of human influence when we decide whether or not to enter a trade – and often, that level of human intuition is what makes the difference in trading. If making a decision as a person didn’t matter, then why don’t we just set up an algorithm to trade? Some people do that, but human traders still continue to outperform machines.

trading headspace

Having the right “headspace” when trading is, therefore, important to a trader. And this is especially relevant when considering risk – a vital component of successful trading that humans are much better adapted at.

Got your risk management sorted? Open your account now!

Caution as an obstacle or a stepping stone

When we develop a strategy, we take into account the risk and then structure our trading style in a way that works in the longer term. That is, if we are successful traders, of course.

The thing is, humans in general calibrate our sense of risk level and adjust our sensitivity accordingly. In other words, we take more cautious approaches when we think the risk is bigger, and act more bold when there is less risk. It’s not the same to risk losing some pocket change as it is to bet your mortgage.

However, this risk sensitivity can have have an impact on our trading style, which leads to increased hesitation to take trades, or forgoing trades altogether. Or if we perceive less risk, then we are willing to take more opportunities.

This is one of the contributing factors to why a trading strategy you develop in a demo account, where there is relatively no risk, might work out great – except when you put real money behind it, it starts to fail.

It’s not the strategy

The issue isn’t that you have a bad strategy, but that you had a different risk sensitivity when you are testing in a demo account than when you are using money.

This phenomenon can repeat itself when you switch to larger trade sizes.

forex strategy

It’s not uncommon for people starting out to want to make money by taking on large trade sizes; but this can get in the way of their strategy succeeding, because they become hesitant in the face of the larger risk and change their style enough so they are no longer making a profit. For some traders, there might be a psychological level in trade size that they have to overcome before they can adjust their risk sensitivity.

Rather than jump in with both feet with a new strategy, sometimes it’s better to slowly build up your trade size over time as you get used to the risk level and keep trading with the same style. This also helps reduce trading stress: if you are stressed and anxious every time you start trading, it might mean your risk sensitivity isn’t calibrated correctly.

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