Do you calculate your position size before taking positions? Most Forex traders don’t do this because it looks hard and complicated to them. You can use THIS Forex position size calculator, whenever you want to get in the market. However, do yourself a favor and read this article to learn (1) why you should calculate your position size as a Forex trader; (2) why you should not risk more than 2-3% of your capital in each position, and why your long-term success is linked to these two. If you want to manage your risks, not to take more than a 2-3% risk in each position, you must calculate your position size, based on your account size, and also the stop loss size of the position you want to take, before taking any positions.
How Much Risk Should You Take in Forex Trading?
You should not take more than 2-3% risk in any position you take. Taking a 2% risk is the best and most optimum. I take even less than a 2% risk in most of my positions. If you take more than a 2% risk while your success rate is not that good and you are not following a proper risk to reward ratio (read this), then you will lose a lot and your account balance will shrink, and so it will become too hard to recover the loss, both technically and emotionally. Even when your success rate is good, you should not take more than a 2% risk in each position because you never know how the market will move. A too strong and sudden movement can wipe out your account while your position is too big and you have taken too much risk because sometimes brokers cannot trigger the stop loss order exactly where they are set.
What Does Taking Risk in Each Position Mean?
“Risk” is the money that you will lose if the market goes against you and hits your stop loss in a position. Therefore, the first thing you must determine before taking a position is the level of the stop loss. It is your Forex trading strategy that tells you where you should set a stop loss order when a signal or trade setup forms. When you know where you must set the stop loss, and so how many pips your stop loss will be, then you should know how many lots your position has to be, so that if the market goes against you and hits the stop loss, you lose only 2% of your account balance. It means, you must calculate your position size or your position lot size, based on the position’s stop loss size, and your account balance. Therefore, in Forex trading, calculating the position size is linked to the stop loss of the position that you want to take, as well as your Forex trading account size.
You must calculate the position size, before taking a position because you cannot change your position size after taking it. You can only close your position, either partially or completely.
Let’s say you have a $10,000 account. If you want to take only a 2% risk in a position, then you should not lose more than $200 if the market hits the stop loss, because 2% of a $10,000 account becomes $200. Whether the stop loss has to be 200 or 20 pips, you should lose $200 if the market hits the stop loss. It means you should calculate and choose the position size based on the stop loss size. Although it is possible to calculate the position size manually, you can use a position size calculator to save some time. In the Forex market, each currency pair has a different pip value, and so it can be a little different to calculate the position size, when trading different currency pairs, whereas a good Forex position size calculator considers the currency pair as well.
What Is a Forex Position Size Calculator?
A Forex position size calculator considers some important factors or parameters to calculate the position size:
- Your account size
- The percentage of the risk you want to take. For example, you want to take a 2% risk in a position.
- Currency pair that you want to trade, and so the pip value. You just need to choose the currency pair and enter the current ask price. The Forex position size calculator can calculate the current pip value of the currency pair based on its current price.
- Stop loss size
When the Forex position size calculator knows (1) your account size, (2) the percentage of the risk you want to take, (3) the stop loss pip size of the position, and the pip value of the currency pair you want to trade, it can easily tell you how big your position lot size has to be. For example, if we assume that EUR/USD pip value is $10 per standard lot, while your account size is $10,000 and you want to set a 55 pips stop loss with your position, then you must take a 3.6 lots position if you only want to take a 2% risk if the market hits the stop loss.
$10,000 x 2% = $200
$200 / 55 = $3.64
$3.64 / $10 = 0.364 lots
Our Forex position size calculator can do all of this calculations for you, if you give it the above four parameters.
Why Should You Calculate the Position Size Any Time You Want to Take a Position?
Your account size changes when you trade. In the above example, if your position makes a 4% profit, then your $10,000 account will grow to $10,400. Therefore, for the next position, if you still want to take a 2% risk which is what you should always do, then you must choose your position in a way that you lose $208 if the market hits your stop loss: 0.378 lots
It is the same when you lose money in the previous position, and so your account balance goes down. It means you should always consider your current account balance to calculate your position size when you want to take a new position. Click Here to use our Forex position size calculator.
What If You Locate Several Trade Setups and Signals at the Same Time?
If you locate several trade setups (buy/sell signals) with different currency pairs, metals, CFDs, etc. at the same time, and you want to take all of them, then you should not take more than a 2% risk for each position, in this case too. However, please note that in the Forex market, currency pairs are strongly linked or correlated to each other, which means if one of the positions goes against you, the other positions will do the same, and so you will lose a lot. For example, if you locate buy signals or long trade setups with EUR/USD, GBP/USD, AUD/USD and sell signals with USD/CHF and USD/JPY and USD/CAD at the same time, then you should not take all of them with a 2% risk because indeed you are taking a 12% risk in total:
6 x 2% = 12%
This is so risky and dangerous. You can easily wipe out your account because of such a mistake. You must take only one of the trade setups that looks stronger, while you are risking only a 2% risk in this case too. Alternatively, if you insist to take all the six trade setups, your total risk should not be more than 2%. Therefore, you must take a 0.33% risk in each position:
2% / 6 = 0.33%
Risk management, position size calculation and then stop loss and target management are the critical factors in your success as a Forex trader. Never trade Forex without considering these factors.
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