Determining Position Size During Forex Trading
For intraday traders and large investors, the process of determining the size of a position while trading is of great concern. During trading, it is crucial to define a predetermined amount of a commodity or stock to accumulate. However, since it is forex trading, daily traders will determine the amount of currency to accumulate. The size of its position, also known as the trade size, determines the level of risk.
Define the position size
The process of sizing positions involves the number of units that one invests in a particular trade. The position size can be calculated using the concept of lots. Therefore, when a trader invests a certain amount on a particular lot, whether it is standard, micro or mini, it is said to be the size of the position. If the trade size or position size is small, the risk of it being assumed is minimal. On the other hand, the reverse occurs when the size of the position increases.
Risks present in the size of the position
Two factors influence the size of the job. The first is business risk, while the other is account risk. Trading risk refers to the challenge of placing an appropriate stop loss order. Essentially, the stop-loss order is a limit set for losses incurred while trading. Therefore, once the stop loss is reached, the trading activity is over. Account risk should be taken into account when evaluating the capital with which currency trading is carried out. The higher the invested capital, the higher the profit or loss margin. Therefore, if we consider why trade forex requires a strategy, the answer would be to mitigate those risks.
Position size in a Forex strategy
Given the relationship between risk in trading and position size, it is clear that determining the right position size is a critical task. However, to do so is not an easy task. Traders, in general, seek to manage risk by taking the following steps:
Set a risk limit
To negate the effects of risk from your account, you must set a risk limit. The most common way to do this is to set a risk limit at 1% of the invested capital. Therefore, if the principal was $ 1000, the risk limit would be $ 10. Therefore, one would be willing to risk a loss of $ 10 by trading.
Analyze the percentage at specific risk
The value of the pip represents a possibility in the price of the currency during a trade. The pip risk should be calculated by subtracting the price of the currency at the entry point from the point where the stop-loss order is placed. For example, consider EUR / CAD. The buy price is at $ 1.4555, while the stop loss is set at $ 1.4550. The pip risk in this trade consists of 5 pips.
Get the pip value
Now that the pip risk has been determined, the pip value needs to be calculated. To calculate the pip value, multiply the exchange rate for the first currency in the pair by the pip values associated with the lot type. A GBP / CAD pip value of a mini-lot is to multiply the value of the mini-lot ($ 1 CAD) by the exchange rate.
Decide on the size of the operation
Finally, you have all the information you need to find the perfect business size. The formula to find it is to multiply the number of pips at risk by the value of the pip and the number of lots traded. This will give you an idea of your risk. By adopting the strategies mentioned above, you can significantly reduce the risks that come with the forex trading network. Therefore, a person should be looking to make a huge profit after creating the ideal position size.