It is very important to determine position size in Forex trading because no matter how strong your Forex strategy is, if your trade size is too small or too big, you will either take no risk or too much risk. The latter scenario is more of a concern simply because risking a lot of money can drain your trading account in no time.
In order to help you determine position size in Forex, there are a few concepts that we would like to introduce you to. The position size is expressed in lots or in units. Both are two different elements and you will get to know more about them in this lesson.
Let’s take the help of an example to make this concept clear for you. Suppose you are trading EUR/USD, the size of your account is $10,000, the risk factor you have selected is 1% on every trade i.e. $100, the risk is 50 pips i.e. Stop Loss, and for each pip the EUR/USD chart is $10.
In this scenario, you can determine position size using the following formula.
Position size = ( Balance * Risk) / (Stop Loss * Value per Pip)
Putting the values of the example in this above equation, we get 0.2 Lots or 20,000 units.
Knowing this figure is important because you will be entering this in your trade. For some reason, if you get it wrong and you entered the market at a wrong position, it means you are going at a bigger risk than what you were supposed to take. Higher the risk means higher the possibility of sustaining larger losses. Similarly, lower the risk result in lower profits. Keeping a balance is crucial.
Lots and Units
A lot is a bigger term that contains 100,000 units of currency. There are also mini, micro, and nano lots that are 10,000, 1,000, and 100 units respectively. So, if someone says a lot, that means 100,000 units of that specific currency.
Watch the below video for further information on “Position Sizing”.
Conclusion
Finding the right position size in the Forex market can make or break the situation in your trading career. As we have discussed in our previous lessons that trading is a highly risky activity, it should be undertaken with due care. Same is the case with the profits. If you are using the right position size, you will not be risking a lot of money and making great profits. In case the position size is not calculated and you make a prediction on your own; not only are you risking your hard-earned money but may end up draining your trading account quickly than your expected.
Always play it safe and use the techniques that are being used by expert traders all over the world. We hope that you like this post and now you know how to determine position size in Forex market. Respecting the inherent risks of trading can make you a better trader. Utilizing the sound money management techniques can help you improve your skills and become better than those who have no clear plan of action whatsoever.