Position Sizing in Forex
What is Position Sizing in Forex?
Position sizing simply is, setting the units to trade (buy or sell) a currency pair. It is the number of units invested by the trader. The determined size should be risk-tolerant. Position sizing helps the trader to determine how many units of security/shares they can purchase by which the user can control the risk and increase the return. Position sizing helps in the successful management of funds deposited in the trading account.
Why position sizing is important?
Position sizing is one of the most important skills that every trader should possess. Position sizing when not properly done can even evaporate the trading account. Avoiding risks and dealing with it is the most important task of traders. So it is important to do position size before starting the trading. In Forex trading, Position size holds more importance comparatively, since it is one of the risk causing factor. Even the best strategy may get failed when the position size is not right. If your trade size is too big or too small then the possibility of the risk is also the same it either too much or too little. So, it important to calculate and fix the size.
How to determine the position size with risk comfort level?
The number of lots its size and type determines the position size. The risk in position sizing can either be a trade risk or account risk. Ideal position size is important in forex trading despite the market conditions or strategy. Determining the right position size can be done easily just by following the recommendations below.
• Account Risk and how to deal with it: Forex position size should be determined properly and proper strategy should be used to deal with the account risk one can face while trading. The trader should fix a certain percentage or amount that they can risk on each trade. This will limit the amount of risk in the account and won’t empty your account. It is recommended to set the limit to 1% or less. This will limit the amount of risk even if the investor does consecutive trades.
• Trade risk and how to deal with it: To deal with the trade risk, determining the stop-loss order (selling or selling the stock when it reaches a certain price) and where to place it is important. Decide how much you are willing to put at stake. For instance, if an investor intends to purchase some share at $200 where he/she sets the stop-loss at $180 then the trade risk is $20/share. Defining the stop-loss price will reduce the trade risk to a greater extent.
• Determining the Position Size: A better understanding of the trade risk and the Account risk will help the investor to determine the position size. The investor will be aware of the 1% risk per trade and $20 (as per the above-mentioned case) per share. With this exact information available in hand the investor can easily determine the position size. The investor simply needs to divide the account risk by the trade risk by which he/she can find how many shares (position size) he/she can buy safely. Apart from this depending on the investor’s currency pair and denomination of account a step or two is required. Where the extra step deals with the currency pair’s exchange rate.
Every trader should analyze their risk profile with the mentioned strategy and then fix the position size. One can make use of the advantage of the largest position size as per the risk profile which still ensures the profit in favorable conditions. The trader should be patient and should make the best with his/her risk profile.