Position sizing on Forex trading

After you have determined you risk and your reward the next thing is your position size. Position sizing comes in when you want to place you trade. Position sizing is the glue that holds risk to reward ratio together. It helps you to know how many lot size will I place for this trade with this particular risk.

For instance, if I am risking $30 in a trade, and the stop-loss is 100pips that means the trade will have to go against me 100 pips before I lose $30. Then on my broker’s platform I will need to calculate a lot size that will give me a pip value that will amount to $30 for 100pips. Depending on the type of account you open micro or standard account. Open a demo account and open trades in each lot size starting with 0.01lot to know the equivalent in pip for each currency you want to trade. One standard lot size is $10 per pip value. For some currency it may not be $10 may be $9.98 or less than that. You can use this formula (Divide your Risk Amount by your Stop Loss)

Now assuming you were able to calculate that 0.01lot size will gives you $0.1 pip value, 0.02 lot size will give you $0.2 pip value etc. Once you discover this, then with 100 stop loss, every 100pips will give you $10. To lose $30, then the appropriate lot size to trade will be 0.03. This means a pip value will be equivalent to $0.3 ($30/100pips) and this trade will have to move against you for about 100pips before you lose $30 from that trade.

Your risk will determine the position size to use. It is not your stop loss. Most traders mess up in position sizing by fitting their stop loss to their desired position size instead of fitting their position size to their desired stop loss. For instance, if I am trading Gold and the set up gives requires a stop loss of 150pips, and my risk is $30. My Calculated reward is $60. The Lot size to take will be 0.02 lot size. For every $0.2 pip move, 150pips move will be equivalent to $30.

To illustrate the example of adjusting your position size to fit the necessary stop loss let’s look
at a daily chart of AUDNZD currency pair below.

Risk-Reward Ratio

Suppose our desired risk amount is $30, but our necessary stop loss distance is 87 pips, because the safest spot for our stop loss in this example is just below the low of the pin bar. So, after dividing the risk amount by the stop loss distance ($30 / 87), we get 0.345. Now, some brokers allow you to trade micro-lots, this basically means you have the flexibility to trade a position size as small as 1 penny per pip, in this case you could trade 3.4 micro lots (0.34 cents per pip), at 0.34 your risk will be just under $30 (0.34 x 87 = $30.0). If you use a broker that does not allow micro-lot trading then mini-lots are your next option, typically these are flexible up to .10 cent increments, this means you can trade .10 cents per pip at the smallest position size. In this case you would just trade .30 lots which would be (0.30 x 87) $26.1 risked. This is how you should view position sizing; always adjust the number of lots you trade (position size) to meet the stop loss distance that gives your trade the best chance of profiting.

NEVER adjust your stop loss to meet a desired position size, this is GREED.

Try as much as possible to know the pip value of each pairs you trade with respect to the kind
of account you open to help you decide the choice of the appropriate lot size to trade.

Besides always keep your risk consistent and never ever touch your trade while your trade is still live. The setup is only invalided when your stop loss is hit or you trade a set up that stalls for the next 2 or 3 days. Assuming you are trading a pin bar, you will regard the pin bar trade to be invalid if price breaks the high or low of the Pin bar. It is normal for a Pin bar trade to retrace
within the body of the pin bar. As long as the low or high is not broken, the trade is still valid and you will do yourself much favour if you don’t touch the trade by exiting prematurely when it is going against you. This is why it is highly important to do your analysis very well, calculate how much you are risking for that trade before you enter. This will help you to wade off emotional sensations that may come in when the trade didn’t move in your desired direction on time.

However, I must let you know that you need to Demo trade using capital that you would like to use for real trading i.e. you fund your demo account with $200 if you wish to start life trading with $200. Funding one’s demo account with $5000 and you plan to start life trade with $200 won’t make you well prepared for eventualities that such life trade would present. In other words, trade volume
sentiments would not be well adjusted.

Another thing worthy of note is the fact that, small capital can easily be wiped off on higher time frame if extreme cautions and money managements are not well applied. You don’t use 0.5 lot size on a 30mins chart with $200 or $500 capital and then switch to a daily chart with the plan to use the same lot size with the same capital! Adjust your position size with your risk.

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