Position Sizing is the part of your trading system that tells you exactly how many Lots / Contracts to buy / sell. Trading system is not just entering rules or exit rules. Some people knows when to entre and when to exit but they do not know about Position Size. Therefore, they could not make positive results.
Position sizing will help you to determine
- How many contracts to go long/short or buy/sell for a particular trade
- Your risk per trade and overall risk to your portfolio
- Your expected returns to your portfolio
Step 1 – Check Your Net Liquidation (i.e. Capital or Balance)
- Example: $10,000
Step 2 – Determine your RISK per trade?
- RISK refers to the maximum loss per trade
- This is the maximum you can lose if your stop loss is hit
- This loss should never be more than 1% - 3% of your capital, in other words never risk more than 1% - 3% of your capital per trade
- Example: RISK per trade 1%, once you confident enough you can RISK 2% or 3% maximum of your capital.
- Your RISK % must be consistent in every trade. You should not change your mind at the time of taking risk, i.e. you risk 2% in one trade and 3% another. You MUST be consistent.
Step 3 – Determine Your Position Size Each trade
No. of Lots = (Net Liquidation X % Risk Per Trade) / (Stop Loss Distance X $Value Per Pip per Standard Contract)
We assume: Our Net Liquidation = $10,000, RISK per trade = 1%, Stop Loss Distance = 20 Pips, $Value per pip = US $10 for EUR/USD
No. of Lots = ($10,000 X 1%) / (20 X $10) = 0.5 Lot Size
That means Your Lot Size is 0.5 or 50,000 EUR. If you forget the contract size, please see my Lesson 4 Forex Basics Part 2
If you want to use Position Size Calculator, you should visit
https://www.myfxbook.com/forex-calculators/position-size