What is position sizing?

Position sizing in Forex Trading is a combination of  risk per trade, stop loss and risk reward ratio.

Therefore to determine the size of your position on your trade , you must first decide on how much you are willing to risk.

Most traders make a mistake of fitting their stop loss to their desired position size instead of fitting their position size to their desired stop loss.

What is position sizing in forex trading?

Position sizing in forex trading is setting the right volume of the amount you want to buy or sell for each currency pair.

position sizing in forex summary

How much money do you want to place in every trade you take?

In other wards, it determines how many units of money/ lots you trade in each position you take.

It can be a micro-lot, min or standard.

It is the  most important tool in Forex risk management and a good skill to accumulating money on your account.

However it’s the most challenging to most Forex traders.

This is because they only focus on how much they can make out of a trade and end up placing their stops losses so tight.

Like we mentioned above, most traders mess up by fitting their stop loss to their desired position size rather than fitting their position size to their desired stop loss.

A proper position size will protect your account since it helps you to determine a stop loss that matches the size you want to use.

To trade successfully you need to first know how much you want to put in a trade. This will help you to determine the amount of risk and expected reward.

Make it part of your trading habits and your trading plan should not miss to have such an important tool.

Why position sizing is important

Position size plays a big role in successful Forex trading.

If you use a large position size, you risk to have large draw downs on your account.  Or your account may be wiped out.

On the other hand, If your position size is too small, then your account won’t grow and you won’t meet your trading goals.

But the right position size keeps you in the game long enough and your account grows steadily.

It is for sure that when you trade with a large size, you can win big returns. But in case a trades goes against you, you lose big too.

Setting the right position size helps you to use the correct amount of units to buy or sell a currency pair.

 It reduces on the risk of large losses on your account and brings consistent profits

 What do you need to calculate the right Position Size?

  1. Account balance.
  2. Your percentage risk per trade
  3. Stop loss in pips
  4. Value per pip
  5. Currency pair you are trading.

Let’s now look at each of the above factors required to calculate a proper position size in detail in our next lesson.

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