If you are interested in trading forex, then one thing that you should be aware of is the forex position size. This measure is one of the most important when it comes to determining your chances of success.
In many ways, it can actually be more important than the entry and exit points.
What is the Forex position size?
The position size is the amount that you decide to hold for the trade. Make it to small, and you are assuming very little risk but also stand to take very little reward. Take a position bigger than you can safely handle and you end up with the opposite problem. You are taking on too much risk and if things don’t go your way you could lose your bankroll.
A position size can be described as how many lots you take for a trade, and they can be mini, micro or standard. Your risk can be thought of as trade risk or account risk.
Thinking of your trades in terms of risk can help you to stay practical and focused, and take emotion (greed, or risk-aversion) out of trading. Professional traders tend to risk no more than 1% of their trading budge on any individual trade. This means that if the markets move the wrong way they live to trade another day.
Some traders will set a fixed dollar limit instead of a percentage. If you opt to manage your account in that way then you will need to set your dollar limit to be less than 1% of your trading budget, so that you don’t run through your budget too quickly if there is a spate of misfortune.
Pips and Risk
When you set up a trade, you will have an entry point and a stop loss point. You want to make sure that your stop loss is close enough to your entry point that you don’t lose too much money, but also far enough away that you won’t sell too quickly, before the upward move you are aiming for occurs. You should set your stop loss at a suitable number of pips. This may differ from trade to trade (where the percentage account risk is something that you need to be consistent with across all trades).
Calculating the Position Size
The position size is easy to calculate:
Pips at Risk x Pip Value x Lots traded = Risk size in dollars
You already know what you are willing to risk, and you already know the Pip Value. You should have worked out how many pips you are willing to risk based on the trade you are making. That means that the missing variable which you need to do some high school algebra to calculate is lots traded. You want to trade enough lots that with the pips you are risking, the risk size is as close to your maximum as you can get.
With some trades that might be a lot of lots. With some trades it may be just a few. Don’t be tempted to deviate because of a “sure thing”.