Determine the right position size in Forex trading
This is a big problem, because the right position size is an important part of good money management in Forex trading and should ensure that in the long run their profits in trading at the end of the day are greater than their losses.
How to choose the right position size in trading ?
As is often the case when trading Forex, CFDs or other financial instruments, it is not possible to make a general statement about how large a position should be. This depends on a number of factors.
Factors on which the position size depends:
Psyche of the trader
Since every trader is different and has a different Forex trading strategy, it is crucial to find the position size that best suits your factors. What happens if the position size does not fit your needs and is too large or too small, we will explain now.
Position sizes that are too large
If your positions are too large, you will most likely not be able to compensate for a longer series of losses and will probably suffer a total loss in the long run. In addition, when trading larger positions mt4 exness to your account, emotions such as greed or fear often come into play more strongly, which can prevent you from consistently following your pre-determined trading.
Too small position sizes
If your position sizes are too small, you will most likely be spared from too big losses, but your portfolio will not really be able to develop. This can lead to a situation where you do not take your trading seriously enough and may become careless in following your strategy.
Optimal Position Size
The optimal position size does 3 things. It fits your psyche and takes into account your account balance and trading strategy. The positions must be small enough to allow you to relax after a series of losing trades, and large enough to allow you to maintain a reasonable level of stress and follow your trading strategy consistently.
By stress, we mean positive stress that makes you work with concentration and increases your sense of responsibility. We do not mean emotional highs and lows that make you doubt your decisions and throw your strategy overboard. This usually occurs when the positions are too large.
Basic rule for correct position sizes
A basic rule when determining position sizes in Forex trading, but also when trading in all other markets is:
The higher the position size, the tighter you need to set your stop loss. Conversely, the further away you want the stop loss to be from the entry price, the smaller the position size needs to be.
Another basic rule is that you should never risk more than 1% to 2% of your capital per position taken. Depending on your trading strategy, the maximum risk may also be 4%. However, these are mostly trading strategies in longer time frames. However, the maximum risk of a single position should never go beyond this and should always be limited with a stop loss.
We now assume a day trading strategy and a maximum risk of 2% per trade. For example, if you have 10,000 Euros in your account, your risk per position taken must never exceed 200 Euros (2% of 10,000 Euros).
This means that you have to choose your position size in such a way that if the position is stopped out by your Forex broker, you can lose a maximum of 200 Euros. For example, if you want to trade 1 lot in EUR/USD, the pip value is 10 USD per lot. We simply assume a rate of 1.25, which means that 1 pip corresponds to a profit/loss of 8 euros.
So you can set your stop loss on a lot maximum 25 pips away from the entry price (200 Euro maximum risk divided by 8 Euro profit/loss per pip). If your strategy or trading setup requires a further stop loss, you simply need to adjust your position size accordingly to avoid too much risk in that trade.