What is Position Sizing in Forex Trading?
Position sizing in forex refers to the number of units invested in a particular security by a trader or investor. An investor’s account size and risk tolerance should be taken into the account when determining the appropriate position sizing.
Breaking Down in Position Sizing
Position sizing in forex refers to the size of a position in a particular portfolio, or the dollar amount that an investor is going to trade. Investors make use of position sizing to help determine how many units of security they can purchase which allows them to control risk and maximize returns.
Using the Correct Position Sizing in forex involves in 4 Steps
1. Determining the Account Risk
Before an investor can use appropriate position sizing for a specific trade, they must determine their account risk. It is typically gets expressed as a percentage of the investor’s capital. As a rule of thumb, most of the retail investors risk no more than 2% of investment capital on any one trade; fund managers usually risk less than this amount.
Example: If an investor has a $25000 in their account and decides to set their maximum account risk are 2% they cannot risk more than the $500 per trade. Even if the investor loses 10 consecutive trades in a row, they have just lost 20% of their investment capital.
Click on below link: Control Your Risk in Position Sizing
2. Determining Trade Risk
The investment must determine where to place his or her stop loss order for the specific trade. If the investor is trading stocks, the trade risk is the distance, in dollars between to intended entry price and the stop loss price.
Example: If an investor intends to purchase Apple Inc. at $160 and place a stop loss order at $140 the trade risk is $20 per share.
3. Determining Proper Position Size
The investor knows that they can risk $500 per trade and risk $20 per share. To Work with the correct position size from the information, the investor simply needs to divide the account risk, which is $500 by the trade risk, which is $20. It means 25 shares can be bought.
4. Position Sizing and Gap Risk
Investors should be aware that even if they are using the correct position sizing, they may lose more than the defined account risk limit if a stock gaps below their stop-loss order. If increased in volatility is expected, such as before company earnings announcements, investors may want to half of their position size to reduce gap risk.