When it comes to risk management, everything counts. And defining the right size for your position plays a key role in the equation. Intuitively you might think the logic behind is pretty straight forward: if the position is a win, go big, otherwise, opt for a moderate size.
Not so fast cowboy. Successful trading is about all being methodic, that means finding a way to determine when to buy, when to sell and sticking to it for the long run. So... time to leave behind your carpe diem approach and get serious!
Defining the right position size is great to keep you inside your risk comfort area. Believe us, finding your position size is not as difficult as you might think. First, time to gather some info:
- Account balance total
- Account percentage to risk
- Currency pairs trading
- Currency pairs rates
- Stop loss positions (pips)
I get it. Writing down some numbers don’t seem to be an issue for you. So let’s get to work with a quick example so you understand first hand how to calculate position size.
Edward deposited 10,000 USD into his trading account. That’s his total balance. He is trading with EURUSD because he likes volatile trades. Also, he tries to risk nearly 200 pips (stop loss) per trade and no more than 1% of his total account balance.
- Step #1: 10,000 USD x 1% = 100 USD (this is the amount he is OK to risk)
- Step #2: 100 USD / 200 pips = 0.50 USD / pip
- Step #3: 0.50 USD / pip x [10,000* EURUSD units / ($1 / pip)] = 5,000 EURUSD units
*10,000 units of EURUSD equals to 1 mini lot.
Another case would be if your trading account currency is the same as your base currency:
- Step #1: 10,000 EUR x 1% = 100 EUR (this is the amount he is OK to risk)
- Step #2: 1.5000* USD / 1.0000 EUR) * 100 EUR = 150 USD
- Step #3: 150 USD / 200 pips = 0.75 USD / pip
- Step #4: 0.75 USD / pip x [10,000* EURUSD units / ($1 / pip)] = 7,500 EURUSD units
*In order to convert EUR to USD we took a 1.5 exchange rate as an example.