While searching for good forex systems you probably have noticed that some forex strategies have consecutive wins and consecutive losses. This often happens when market conditions changes. For example, strategy has many wins in a row when volatility or other factors are beneficial to the strategy and at some point in time it starts to loose. Losses often come in a row because something has changed in the market and strategy fails under new market conditions.
There are several ways to resolve this problem. You can find some indication of changed market conditions and do not trade at this time. However this is easier to say than to do. This leads to the easier solution which can be incorporated in any strategy. If forex system has consecutive wins and consecutive losses you can make it more profitable even without knowing the reason why it starts to fail. Money management helps here. More specifically – decrease factor.
What is decrease factor in money management and how it can help you in forex? By using decrease factor you can decrease your position size after defined number of consecutive losses. E.g. let’s say your usual position size is 1 lot and you decrease this size to 0,2 lot after one loss or several consecutive losses. It will minimize draw down during bad streak. You will go back to normal order sizing after the first win.
In order to understand better how decrease factor helps we can take example when 5 consecutive losses happen and make some simple calculations. Let’s say that your usual position size is 1 lot and you are risking $300 on one position. The total loss in bad streak would be:
Without decrease factor: 1+1+1+1+1 = 5 lots (5 * $300 = $1500 loss)
Decrease to 0,2 after 2 losses: 1+1+0,2+0,2+0,2 = 2,6 (2,6 * $300 = $780 loss)
Decrease to 0,1 after 1 loss: 1+0,1+0,1+0,1+0,1 = 1,4 (1,4 * $300 = $420 loss)
You can see that losses can be decreased several times. You need less time to recover from losses when market conditions becomes in favor of the strategy. It lowers the risk and limits draw downs. Sometimes it can even help to turn unprofitable strategy into profitable one.
Of course it can affect the profit as well so you should find the right combination which works: when to decrease and how much to decrease you can find out by testing the strategy.
This will not help strategies with evenly distributed wins and losses, but usually these wins and losses are not evenly distributed during time, so decrease factor can help in those cases.
If you are interested in using decrease factor in expert advisors, you can find a tool with this feature here. You can add decrease factor to any EA which you build with this online tool.