What’s the Best Forex Position Size? Hint: Use Fear

Trading_fear

Happy Friday!

This week’s question comes from Madison, who asks:

What’s the best Forex position size to use when trading the higher time frames?

You can have the greatest, most profitable trading strategy in the world, but if your risk is too high, you’re destined to struggle.

Finding the right position size is a critical part of achieving success as a Forex trader.

It doesn’t matter if you use raw price action, indicators, trade the daily charts or the 15-minute time frame. Deciding on the proper amount of risk should always be at the top of your list.

But what is the best way to decide a reasonable amount to risk? How much is too much?

Believe it or not, there’s an easy way to tell.

By the time you finish reading today’s post, you will understand the direct relationship between risk and emotions. You will also know how to use emotions such as fear to determine a position size that not only compliments your trading style, but also fits your personality.

Read on to learn how to find a Forex position size that works for you.

Fear Is the Great Indicator

Knowing how much to risk per trade is critical to your success as a trader. Get it right and everything begins to fall into place. Get it wrong and even the simplest tasks become insurmountable.

There’s a reason for that, and it has to do with your emotions.

You have probably figured out by now that becoming a profitable trader is one of the greatest challenges you will face in life. However, it isn’t difficult because it is complex. After all, you have just three options: do nothing, buy, or sell.

Rather, it is emotions like fear and greed that make it such a challenge. In other words, we have a way of making it more difficult than it has to be.

Keep in mind though, fear doesn’t have to be a bad thing. In fact, it can be extremely useful as a sign that something is wrong.

When it comes to deciding on a position size, fear is your best friend.

How so? If you’re overly fearful about a trade you just placed, it’s a surefire sign that you’re risking too much capital.

When that happens, you know it’s time to scale back and risk less.

Two things happen when you fail to listen to fear.

  1. You start hovering over your position by checking your charts incessantly throughout the day; and
  2. You close the position prematurely.

Those two go hand in hand. The more you hover over your open position, the greater the chance you will close it prematurely at the first sign of danger.

Every good swing trader knows that time and space are necessary factors for a trade to play out in your favor. If you suffocate a position because you fear losing money, you won’t be giving the market the time and space it needs to do the heavy lifting.

The key is to reduce your position size to a point where fear is no longer a factor.

If you lose, so be it. Your next winner is just around the corner. That’s the mentality you need to develop if you want to mitigate the negative effects your emotions are having on your performance.

Process Now, Profit Later

Trading_processExcessive risk exposes a troubling (and common) dilemma for traders. It shows that you’re more concerned with making money than you are with mastering the trading process.

It also highlights the fact that you are more interested in making money than you are in protecting what you already have. Otherwise, you wouldn’t be overleveraging your account.

You may be thinking, but isn’t making money what trading currencies is all about?

Not at all. In fact, if you’re in it solely for the money, you are going to have an incredibly difficult time achieving consistent profits.

Those who make it in this business have a passion for the markets, not money. It’s a childlike fascination with it and a “me versus the market” mentality that pushes us across the finish line. The money is just the byproduct of implementing a profitable process.

Now, what do I mean by process?

The trading process includes everything from your morning routine to the strategies you employ. The amount you risk per trade is also part of that process.

You could say that the hundreds of trading lessons I have written on this site make up that process. And if you put all the pieces in their place and stay disciplined, you’ll have some profit to show for it.

That’s why any profit you make is just the byproduct of a successful process.

It’s impossible to achieve consistent profits without having a well-rounded process in place first. It would be like expecting to win the World Cup without establishing your team’s formation or working out strategies and set pieces beforehand.

If you want to succeed as a Forex trader, you have to stop focusing on making money. Let profits become a byproduct of your process, rather than the primary objective.

Cut Your Risk in Half

Cut_riskWhat if I told you there is a way to all but guarantee that you’ll have more success in the market?

The best part is you can make this change today and there is no learning curve.

So what is it? Cut your risk in half.

That’s it. If you’re risking 4% of your account balance today, try risking 2% from now on. And if you’re risking 2%, cut it to 1%.

This simple change is especially helpful for those risking excessive amounts. Think how your fear and anxiety levels would subside if you went from risking 10% on every trade to 5% or less.

The idea behind this shift is to get you focused on the process rather than the profits. One of the best ways to do that is to make it less about the money and more about the what, how and why of trading.

Cutting your risk will allow you to focus on the market, rather than how much you might win or lose. In other words, it removes money from the equation.

Use Fear to Your Advantage

Using the previously mentioned method of cutting your risk in half, let’s now add fear as an indicator.

Assume for a moment that you have been risking 5% of your account balance on each trade. You’ve noticed that you hover over your positions too much which causes a negative emotional response.

Based on what you just learned, you know that it’s time to cut your exposure in half. That leaves you risking 2.5% of your account balance on each position.

Now, here’s where fear becomes your most useful trading indicator.

After one or two trades, step back and ask yourself whether you feared losing that 2.5% of your account.

Did you still hover? Lose sleep? Were you anxious or overly stressed?

If you answered yes to any of those, it’s a sign that you’re still risking too much. Following the same process, you could try reducing your risk to 1.25%, or even to 1.5%.

After a few more trades, ask yourself those same questions.

Did you hover, lose sleep, etc.? Follow this process until you no longer fear losing money and instead see it as a necessary business expense.

Remember, the goal is to remove fear from the equation because you can’t expect to stay disciplined if fear is hovering over you like a black cloud.

No two traders have the same tolerance for risk. It’s up to you to figure out where you draw the line, and the methods we just discussed are a great place to start.

Final Words

If you fear losing money as a trader, you’ve already lost. Not only are trading losses part of the process, but they are also a business expense and you can’t find profitable trades without them.

You will know right away if you’re risking too much based on how you feel after placing the trade. If you’re anxious, stressed or even excited about the market moving in your favor, it’s likely that your position size is too large.

The way you act after putting on a new position is another great indicator. If you’re checking your charts every hour, or worse, staring at each pip go by, it’s a sign that you’re risking too much.

If you find yourself doing any one of these things, a quick fix is to cut your risk in half. No matter what you’re risking today, try cutting it by at least half. You can try reducing it even more if you need to, however a 50% cut is a good starting point.

Your Turn: Ask Justin Anything

I’d love for this new 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:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.
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