Will You Be Trading Next Year?

Will you be Forex trading next year?

Learning proper position sizing helps you stay in the Forex game over the long haul. Because you are risking a small percentage of your account per trade, you avoid the common mistakes of over leveraging your account, and trading with the negative emotions of Revenge, Greed and Fear.

It is an essential element of solid Forex trading plans. It allows you to play your statistical edge, which is applied to a large series of trades, and eliminates the need to be right on any one trade. Position sizing helps you manage the one thing in trading that you can control: how much you will lose if you are wrong. Position sizing is critical to Forex trading.

Definition

Position sizing is a part of Money Management that tells you how many lots to trade without exceeding the amount you are willing to risk per trade.

Risking 1% or 2% of your account balance per trade is a good starting place. Do some research and find out what percentage is best for you. Advanced traders can risk up to 5% on very select trades that are either 80%+ winning or trades that are likely to give you huge pip moves.

Information Needed To Do the Math

1) You will need to know your Account Balance.
2) You will need to know the percentage of your account you are willing to risk per trade. (1-2% good starting point)
3) You will need Pip value in Dollars for the currency pair you are trading.
4) Decide on your Stop Loss value in pips.

Example A

Account Balance = $2000,
2% Risk = 0.02
1 pip = $1.00
Stop Loss = 15 pips x $1.00 = 15 pip Stop Loss

($2,000 X 0.2 = $40 / 15 pip Stop Loss) = 2 mini lots per position

Proper Position size is max of 2 mini lots per position for a $2,000 account where a pip is equal to $1.00 with a 15 pip Stop Loss and 2% max risk.

Example B

Account Balance = $2000
2% Risk = 0.02
1 pip = $1.10
Stop Loss = 15 pips x $1.10 = 13 pips Stop Loss

($2,000 X 0.2 = $40 / 13 pip Stop Loss) = 3 mini lots per position

Proper Position size is max of 3 mini lots per position for a $2,000 account where a pip is equal to $1.10 and the Stop Loss is 13 pips and 2% max risk.

The tighter the stop the more lots you can trade. The Major Forex Currency pairs have a pip value equal to $1.00 USD. The crosses and exotic may not. So be aware of the pip value for the pairs you trade. There are other formulas and approaches to calculating position size, but this is the simple one that I use often. If you are lucky your trading software will have this feature, or you may be able to create a spread sheet to automate the process.

I teach position sizing in my Forex Training, and give you 2 Weeks of our classes free. I will show you the many ways we use this to benefit our trading by increasing the average win size in $ and decreasing the average loss. Good Trading.