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This week’s question comes from Emmanuel, who asks:
How do I calculate the position size for my trades, and how much should I risk?
What if I told you that you could lose money on over 100 trades before even having to worry about a blown account?
And not just any trades, but 100 trades in a row.
Heck, let’s make it 200 trades.
The odds of you losing 200—or even 100—trades in a row are incredibly slim.
In fact, this scenario is downright unrealistic.
Of course, your goal as a trader isn’t simply to avoid a blown Forex account.
However, the longer you can stay in the game, the greater your chances are of finding success.
That’s the key here.
Today I want to talk to you about the importance of proper position sizing when trading Forex.
I’m also going to walk you through the steps I use to get the job done in 30 seconds or less.
So how can you position size like a pro in 30 seconds or less?
First, let’s rewire your brain so that you think correctly about risk in the Forex market.
Most traders think about risk as if it’s an unemotional topic.
How many times have you heard the following?
Risk no more than 2% of your account balance on each trade.
It sounds easy enough, and the process of calculating 2% of an account balance is as straightforward as it gets.
But here’s the thing…
Your emotions are tied to the amount you risk.
Read that a few times if you must, because it’s the key to understanding the significance of today’s topic.
You can’t just pick a number like 2% and call it a day.
I mean, you could, but if the goal is to keep your emotions under control then you’d better give this decision some serious thought.
Risk too much and your emotions will get the better of you.
Risk too little, on the other hand, and your winning trades won’t feel meaningful which can lead to overtrading.
We’re all wired differently, so why choose an arbitrary number like 2%?
For instance, I think anything over 1% of my balance is a lot to risk on one trade; at least all at one time anyway.
In fact, I almost always enter the market in 0.5% increments.
You may view that as being too conservative, and that’s okay.
That difference in opinion proves my point: since no two traders are alike, everyone should decide independently on a number that suits them.
Remember, the goal is to keep emotions in check. You can help do that immediately by lowering your risk to an amount you’re comfortable with.
I use the calculator I built for myself. You can get access here.
The best thing about this position size calculator is that it’s incredibly easy to use.
The first step involves selecting your account currency.
This is the currency you use to fund your trading account.
For instance, if you live in the United States you would select USD. If you live in a eurozone country, you would choose EUR for your account currency.
Next you should enter your account balance.
If your balance is $5,000, you would enter “5000” here without any symbols or comma separators.
It’s also good practice to exclude any profit from open positions.
So if your balance is $5,000 and you have an open position worth $100, you would enter “5000” here excluding the $100 in open profit.
Because that $100 in open profit is not yours until you close the position.
The third step is where you will enter your risk percentage.
This is the percentage of your account balance you’re willing to risk on this trade.
Be sure to remove the percentage symbol when you enter this number.
You can also toggle between risk percentage and money.
Using money instead of risk percentage allows you to enter the dollar amount you’d like to risk.
So if you know you’re comfortable risking $50, you can enter it here. But again, be sure to strip the currency symbol.
Next you’re going to enter your stop loss in pips.
If the trade setup calls for a 30 pip stop loss, you would enter “30” here.
This is why defining a stop loss upfront is critical.
Not only does it tell you when to get out if the market moves against you, but it’s also required to calculate a position size correctly.
Last but not least, you’ll want to choose the currency pair you’re trading.
That should be pretty self explanatory.
Now, if a new field appears after selecting the currency pair, don’t worry because I’ve got you covered with step 6 below.
As the name of the field implies, you need to enter the current price of the currency pair you’re trading.
In this case, I’ve selected USDCAD in step 5 so I would enter the current price for USDCAD here.
If your account currency is USD and you choose a pair such as EURUSD or NZDUSD, you will not need to enter the price for those pairs.
That’s because the quote currency (second currency in a pair) is the same as your account currency.
Once finished, I can click “Calculate” to get my results.
The results portion of the calculator shows five fields.
Depending on your Forex broker, you may need to enter the position size in units or lots.
My broker allows for units, so I would enter 44000 for my position size using this example.
However, if your broker only accepts various lot sizes, you will need to enter either 4 mini lots or 44 micro lots for this example.
If you aren’t sure what your broker uses, be sure to ask them.
Otherwise, you could find yourself entering a position size that’s far too large for your account.
In case you missed the link above, here’s the Forex position size calculator I use.
Choosing what percentage you’ll risk is only half of the equation.
The other half involves accepting the risk.
I would argue that accepting the amount at risk is the most important part of the equation.
If you aren’t comfortable losing 2% of your account on one trade then choosing it as your risk amount does you no good.
In fact, it will only cause damage down the road.
So how exactly do you “accept” the risk?
Like most things in life, it helps to ask yourself a series of questions.
Even if you’re only risking 0.5% of your account balance, it’s important to make sure the setup in question is worth the risk.
If it isn’t, you shouldn’t be risking any capital regardless of the amount.
A good way to think about this is to visualize the loss.
It’s far too easy to risk money online. The fact that we can’t physically see the money leaving our account makes it easier to place bets.
However, when you visualize losing $50 or $100, it can take on a whole new meaning.
Again, it’s about visualizing how your account will look following the loss and also how you might feel.
If you have a $500 account and you lose $100 on one trade, I can all but guarantee you will be emotionally compromised.
You want to choose an amount so small that a loss becomes almost meaningless.
If you see a trading loss as anything more than the cost of doing business, it’s a sign that you are risking too much.
Whether you risk 2% or 0.5% of your balance per trade, it’s important to choose a percentage and dollar amount that you’re comfortable with.
Not only will it keep you in the game longer, it will also help to keep your emotions in check.
If in doubt, go with the smallest percentage. You can always increase your risk as your confidence grows.
I’d love for this weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...
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