Each trader in the forex market defines their position size before moving forward with a trade. The position size helps them understand how many units of the currency pair they are willing and able to purchase, leading them to have control over their trading costs and risks.
In this article, we take a look at how you can determine your forex position sizing:
What is position size in forex?
Position size in forex is the total number of currency pair units a trader invests in. It is the size of the trade being purchased. Traders consider their account size and risk tolerance before deciding the forex position size. The higher the account size and risk tolerance, the higher position size they can choose. The lower the account balance and risk tolerance, the lower the position size they prefer.
- Determine stop-loss levels and placement
To determine your forex position size, you need to first know where to place the stop-loss level. You can use market volatility indicators, price swings or just select an arbitrary value to define your stop-loss level.
Once you know where to set your stop-loss, measure the length or distance between the stop-loss price level and the entry price level to get a precise idea about the lot size you should be trading.
- If your stop-loss and entry price are near to each other, a larger lot size can be traded since markets are said to be less volatile.
- If your stop-loss and entry price are far from each other, a smaller lot size can be traded since markets are said to be more volatile.
- Define your risk tolerance level
A bigger position size for forex also means bigger risk, and that is why it is essential to define your risk tolerance level clearly before determining the position size.
The risk tolerance level represents the total amount of money you can afford to lose while trading forex. You can define your risk tolerance level as a percentage of your account, as most traders prefer 1% of the total account’s size as their risk. So, any amount beyond this 1% is not put at risk by the trader and position size is determined accordingly.
For example, if you are trading with a $1,000 account size, your risk tolerance would be 1% of $1,000 which is $10, and you will not be risking more than $10 on single position size.
- Calculate the lot size and pip value
Lot size in forex refers to the commonly traded amounts or the number of currency pairs that a trader buys or sells.
Pip or percentage in point, is the slightest price move for a whole unit of a currency pair in a forex market.
Determining position sizing requires calculating the pip cost/value and lot size that you will be trading.
The larger your position size, the bigger your chances to lose per pip and vice versa. The potential trade size can be calculated by dividing your risk tolerance amount by the number of pips you are willing to risk. The amount you get through this calculation will be the total value that you should risk per pip.
- Set a per trade account risk limit
The next step to determining is to set a percentage limit of the whole trading amount you are willing to risk on each trade. For example, if you are trading with a $1,000 account size, you can limit your risks at 0.5% or 1% and fix $5 or $10 per trade as your risk tolerance. Applying this fixed limit allows you to trade without worrying about wiping off your total account size.
If you want to fix a whole amount, you can consider setting a particular amount of dollars, like $8 per trade for a $1,000 account size. The limit risks are always kept constant no matter how frequently other trading variables change. - Determine the trade’s position size
Now you can finally calculate your ideal position size through a position size calculator or directly use the below formula –
Pip value * Pip at risk * total lots traded = amount at risk
For example, if you are trading with a $1,000 account with a 1% account risk limit on each trade, your maximum risk amount will be $10 per trade. Assuming you want to trade USD/EUR, you decide to enter a long position at 1.5351 after placing a stop loss at 1.5341. Hence, you are putting a minimum of 10 pips at risk per trade (because of $1.5351 – $1.5341 = $0.0001 or 10 pips). Because you are trading a mini lot, the movement of each pip is only $1.
Adding these numbers to the formula will provide you with the ideal fx position size you should trade –
10* $1 * total lots traded = $10
Hence, total lots traded = 1
Hence, according to this formula, you should buy one mini lot or 1/10th of a standard lot (because ten mini lots are equal to one standard lot) = 10,000 units of USD/EUR.
Calculate your ideal position size and place your first order today
Calculating the ideal position size helps you place successful trade orders in the forex market whilst minimizing risks and maximizing profits.
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