Position Sizing Tips

Your position size is the amount of currency units you are trading. Since in forex, currency units are measured in lots, the position size is the number of lots you take on.

There are online position size calculators available which, if you know how much you want to risk and how much reward you want, will do all the calculation for you. However, if you’re interested in doing this yourself the formula is given below.

Position size = (Risk% x Capital) / (Stop Loss x Value per Pip)

What we’re focusing on here is risk management and risk/reward related tips to help you figure out what should go in each of the empty sections of the position size calculator.

1.       Risk only 1-3% per trade

Do not risk more than this. In the beginning when you’re just testing the waters and getting to know the market, stick to 1%. As you gain more confidence in the system and in your ability, you may move on to higher percentages.

It can be tempting to amp the risk/reward up, but the thrill is not worth the loss. The key to successful trading is consistency.

If that trader has risked 1% on the winning trade, and also made small profit (because less risk means less profit), but risked 5% on the losing one, they probably lost a lot more than they made. If your risk/reward is not too high, but it’s consistent and you trade wisely, you will have made an overall profit. Inconsistent risk% will mean that there’s a much greater chance for the trader to lose money overall even after making small profits.

2.       Don’t compromise on Stop Loss

If the stop loss is placed 40 pips below they entry, the risked amount divided by the pip difference between the entry and stop is the value per pip.

This can be counterproductive because now by moving your Stop Loss up, you are limiting your trade. There isn’t enough room for market fluctuations and you will very likely lose some money and have to exit before the market actually moves in the direction you were hoping for it to move in.

It is better to make money (even if it is a little less than you wanted to make) then lose it on a potentially winning trade.

1.       Don’t base your position size on previous performance

There are two ways in which this happens. Someone is on a winning streak and they become over confident. This leads to them increasing their position size and this can prove to be dangerous.

The other way the past comes to haunt some traders is when there have been some losses in the recent past. This might make the trader too careful almost to a fault.

Therefore, the best approach to deciding the position size is to detach yourself from past performance (if it is a one or two day streak. If the strategy never worked, you might need to reconsider).

Even when you are using great tools such as useful indicators or the best forex signal provider in the world, you still need to be able to get basic things such as position sizing right in order to be successful.

 

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