Mean reversion in forex trading


Managing price extreme risk

While forex pairs may revert to historical means over a long horizon, positions can still move against traders towards extremes in the short term. There are several methods traders can employ to mitigate such risks:

Scaling

Scaling involves reducing lot size in order to save enough capital to act again if the market moves against you. By doing so, traders are more likely to capture the price extreme. In the example below, breaking the trade into four orders of 0.25 lots as the price moves higher allows the trader to profit from moves down from 158.00.

However, if the market continued to trade higher, then the trader would still have a full 1.0 lot of risk and could experience large losses.

EUR/JPY historical prices with scaling example



This article was originally published by a www.ig.com . Read the Original article here. .