You can have the best forex strategy in the world, but if your trade size is too big or small you'll either take on too much or too little risk. The former scenario is more of a concern, as risking too much can evaporate a trading account quickly. Your position size is how many lots micro, mini or standard you take on a trade.
Your risk is broken down into two parts--trade risk and account risk. Here's how all these elements fit together to give you the ideal position size, no matter what the market conditions are, what the trade setup is, or what strategy you're using. This is the most important step for determining forex position size.
Set a percentage or dollar risk limit you'll risk on each trade. If your risk 0. While other variables of a trade may change, account risk is kept constant. Choose how much you're willing to risk on every trade, and then stick to it. Pip risk on each trade is determined by the difference between the entry point and where you place your stop loss order. The stop loss closes out the trade if it loses a certain amount of money.
This is how risk on each trade is controlled, to keep it within the account risk limit discussed above. When you make a trade, consider both your entry point and your stop loss location. You want your stop loss as close to your entry point as possible, but not so close that the trade is stopped out before the move you're expecting occurs.
Once you know how far away your entry point is from your stop loss, in pips, you can calculate your ideal position size for that trade. We also know the Pips at Risk step 2. We also know the Pip Value of each current pair or you can look it up. This results in 10 pips of risk. This is your exact account risk tolerance, therefore the position size is precisely calibrated to your account size and the specifications of the trade. Updated October 14, Ideal position size is a simple mathematical formula equal to: All that leaves us to figure out is the Lots traded , which is our position size.
You can plug in any numbers into the formula to get your ideal position size in lots. The number of lots the formula produces is linked to the pip value inputted into the formula. If you input the pip value of a micro lot, the formula will produce your position size in micro lots. If you input a standard lot pip value, then you'll get a position size in standard lots.
Final Word Proper position sizing is key. Then note your pip risk on each individual trade. Based on account risk and pip risk you can determine your position size in lots. Risk too little and your account won't grow; risk too much and your account can be depleted in a hurry.More...