Forex Strategy: Calculating the Size of Your Trading Positions
Forex day traders must master a number of skills before they should begin trading real money. But calculating the size of a position is one of the most critical. Why? Success in Forex trading is all about managing risk, and properly sizing your trading positions will ensure you're managing risk wisely.
To calculate your position size, you must know several key pieces of information. You must know:
Your Account Balance
Currency Pair You Wish to Trade
% of Balance You're Willing to Risk
Where You Will Set Your Stop Loss
Currency Values
Once you've determined this information, you can begin to calculate how much currency you will buy.
Determine Your Risk
Your account balance is easy enough to figure out. But then, you must calculate the amount of that balance you're willing to risk. Typically, the majority of traders tend to risk 1-3 percent on a single trade. It's very rare for a trader to risk a greater percentage, as the losses can add up quickly and completely wipe out his or her trading account.
For example, if you had $10,000 USD in your trading account, you could risk between $100 to $300 USD per trade. If you were risking 10 percent of your account - or $1,000 USD - a string of 10 losses would wipe you out completely. With 1 percent risk, it would take 100 losses in a row to do the same.
Setting Stop Loss Amounts
There are many different ways to determine stop losses for specific trades. Some day traders use market swing analysis to set these points, while others use volatility indicators. But those are just a few examples; there are hundreds.
Yet, it's critical you have a stop loss value set before calculating your trading position. For example, if you were trading EUR/USD, and the price was 1.1000 and you set your stop loss at 50 pips, you would stay in the trade until the value dropped to 1.0950. Once you've determined the stop loss in pips, you can calculate your position size.
Position Sizing
Calculating position size is fairly simple. Say you had an account balance of $10,000 and you were willing to risk 1 percent, or $100 USD, per trade. Additionally, you know that you will set your stop loss at 50 pips. You would calculate thusly by looking at the value per pip, and to find this you must note the size of the lot you will be trading.
There are standard (100,000 units), mini (10,000 units) and micro (1,000 units) lots. With standard lots in EUR/USD, one pip equals $10, and it's $1 per pip in a mini lot. In the micro lot, it's $.10 per pip.
Thusly, if your stop loss was 50 pips in a EUR/USD, that stop loss would equal $50 if you were trading a mini lot. Therefore, you could leverage your trade and buy 2 mini lots and still stay within your risk factor of 1 percent. Once you have the pip value - in this case, it would be $100 / 50 = $2 per pip - you narrow down the size of your trading position.