How to Determine Position Size when Trading Forex

Your position size, also known as your trade size in units (lot size), is more significant than both your entry and exit points when you are day trading Forex.

You could have the best forex strategy in the world, but if the size of your trades is too large or too small, you will either expose yourself to an unacceptable level of risk or not enough risk at all. And putting too much of your money on the line will soon wipe out your trading account.

In this article, we show you how to determine your position size along with accurate risk management techniques.

It has been asserted that the size of the position that you take in your trades is the single most essential aspect in determining how much equity you can build up in your trading account with a broker like Khwezi Trade.

In point of fact, position sizing will account for the rewards that a trade can provide in the quickest and most exaggerated ways possible.

Because of the potential to leverage positions, with brokers like Khwezi Trade, and the presence of a trading system that is open 24 hours a day (5 days a week) and provides consistent liquidity, the Forex market in particular is a venue that enables different size positions to be placed.

One of the ways to take meaningful positions is to make use of leverage. You can take control of a very significant stake in the foreign exchange markets with just a relatively small initial investment; a leverage ratio of 100:1 is quite frequent in this industry.

In addition, the liquidity of the market in the major currencies ensures that a position can be entered into or liquidated at a speed comparable to that of the internet.

Because of the speed at which trades are executed, it is critical for investors to be aware of when it is appropriate to close out their positions.

To put it another way, before entering any trade, make sure to calculate the potential loss associated with that trade and then place stops that will get you out of the trade as quickly as possible while still putting you in a position where you are comfortable entering the next trade.

Although taking on huge leveraged positions opens one up to the prospect of making substantial returns in a relatively short period of time, this strategy also exposes one to a greater degree of risk.

Determining the appropriate risk

To begin, every trader needs to conduct a personal risk assessment and determine how much they are willing to stake.

Traders should only play the markets with what is known as “risk money,” which means that even if they were to lose everything, they would not be left in a desperate financial situation.

Second, every trader needs to calculate, in monetary terms, the maximum amount that they are willing to lose on a single transaction or trade.

If a trader has R 10,000 in capital to invest, for instance, they need to determine what portion of that total capital (as a percentage) they are ready to put at risk on each given transaction. In most cases, this number falls around between 2 and 3 percent.

You could raise that proportion to 5 or even 10 percent, depending on the resources you have and the level of risk you are willing to take, but beyond that point, it is not recommended going any higher than that.

You are free to increase your stake if the risk-to-reward ratio of the possible trade you are considering is sufficiently low. In order to calculate your risk reward ratio accurately, you need to have a firm grasp on your methodology, also known as the “expectancy” of your trading system.

In its most basic form, expectation can be understood as a measurement of the reliability of your system and, consequently, the level of confidence that you will have in placing your trades.

The importance of stop losses

When it comes to determining the size of a forex position, this is the most crucial phase. You should restrict the amount of money or percentage you are willing to lose on each trade. Account risk should be maintained at the same level regardless of any changes to the other trade variables.

Do not risk 5 percent on one trade, then 1 percent on the next trade, and then 3 percent on the next trade.

Make a decision on the percentage or the Rand number that you will use, and stick with it, unless you reach a point where the Rand amount that you have chosen surpasses the limit of 1 percent.

You should always calculate the number of pips you will lose if the market goes against you and if your stop is hit in order to determine how much you should put at risk in your trade and to get the most value for your money.

This will allow you to determine how much you should put at risk in your trade and will allow you to get the most bang for your buck. When trading in foreign exchange (Forex) markets, using stops is often more important than when investing in equities markets.

This is due to the fact that even relatively little shifts in currency relations can quickly result in significant financial losses.

Determine your pip risk

Now that you are aware of the maximum amount of money that can be lost on each trade, you can focus your attention on the trade that is now being presented to you.

The difference between the position at which you enter the trade and the point at which you set your stop-loss order is what determines the pip risk for each individual trade.

Pips, which is an abbreviation that can mean either “percentage in point” or “price interest point,” are often the tiniest variable component of the price of a currency. A pip, often known as one-hundredth of one percent, is the unit of measurement used for the majority of currency pairs.

The transaction is terminated according to the stop-loss order if it falls below a certain loss threshold. It is how you ensure that your loss will not be greater than the account risk loss, and the location of it is also determined by the pip risk for the deal.

Pip risk might change depending on the volatility of the market or the trading method. There are occasions when one trade can have a risk of five pips, while another deal might have a risk of 15 pips.

When you enter a trade, you need to give thought to both your entry point and the location of your stop-loss order.

You want the stop-loss order to be as close to your entry point as is practically possible, but you don’t want it to be so close that the trade is terminated before the move that you are anticipating.

After you have determined, in terms of pips, how far apart your entry point and your stop loss are from one another, the next step is to compute the value of a pip depending on the lot size.

Determining pip value per trade

If you are trading a currency pair in which the United States dollar is the second currency, also known as the quote currency, and your trading account is financed with dollars, then the pip values for different sizes of lots will always be the same.

If the quote currency in the pair you are trading is not the U.S. dollar, then you will need to multiply the pip values by the exchange rate that applies to the dollar in comparison to the quote currency. If your trading account is financed in dollars, then this step is not necessary.

Final Thoughts

The number of lots, as well as the type and size of lots that you buy or sell in a trade are the factors that determine the size of your position.

The size of the position that you take in your trades is the single most essential aspect in determining how much equity you can build up in your trading account.

In point of fact, position sizing will account for the rewards that a trade can provide in the quickest and most exaggerated ways possible.

You should always stake enough in any trade to take advantage of the maximum position size that your own personal risk profile allows, while at the same time guaranteeing that you can still capitalize and make a profit on positive circumstances.

It implies taking on a risk that you are able to withstand, but going for the maximum each and every time that your particular trading philosophy, risk profile, and resources would accommodate such a move.

An expert trader should hunt for high probability trades, maintain patience and self-control while waiting for them to come up, and then wager the largest amount possible while adhering to the parameters of his or her own unique risk profile.