By Warren Seah
Many seasoned traders know position sizing or determining the size of each trade is a vital part in forex trading. Many beginning traders however make the mistake of not paying adequate attention to this step. They believe that it is enough to simply define the initial stops. The problem happens when they begin to trade the higher time frames.
Trading higher time frames in forex market usually demands a trader to set a greater stop loss than trading smaller time frames. If traders trade the same lot while trading the higher time frames, it will require a stop loss set further away from the presumed entry price. This will mean that they are taking more risk. That is where position sizing comes into picture.
Position sizing helps a forex trader limit their risks in trading. It not only limit the amount of risk per trade, it also allows a small time trader to trade forex market at a higher time frame taking advantage of longer term market opportunities.
Small investors will not be restricted at a particular time frame. It is a powerful investing concept. This article will explained position sizing in simple terms, the benefits and the ways in which to incorporate it.
Getting the right position size to enter a trade isn’t as complicated as you would imagine. You will first need to decide how much money as a percentage of the account you are willing to lose on a single trade.
The amount varies for every trader, depending on the amount of risk the trader is willing to take on, but generally speaking, 2 to 5 percent is a typical number. The more money you risk on each trade, the faster your account will be damaged if you lose more than one trade consecutively.
Second, you will need to calculate how many pips is your stop loss away from your presumed entry price. Using the following position sizing formula which only applies for the forex market):
(Account balance X Acceptable risk per trade %) / (Number of Pips stop loss away from presumed entry price) = ( value denominated in mini lot )
($20,000 X 3%) / (75) = 8 mini lots
Using this calculation, we have determined the proper position size for this trade to be eight mini lots. It is important to note the leverage ratio and the margin required for trading 8 mini lots.
Forex position sizing therefore determines the amount of contracts a trader can buy without exceeding their maximum risk per trade. With this example, even beginning investors can position size their trades without risking too much on one position and he has the choice to choose whether to trade for short term profits or longer term market opportunities.
About the Author
Warren Seah
“Introducing 11 Exit Strategies, What Every Disciplined Traders Need … Go Without It You Could End Up Being A PIP VICTIM Just Like Thousands Of Traders Out There.”
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