Position Sizing and Risk

12 June 2016, 08:05
Sherif Hasan

The single most important factor in building a smooth equity curve in your trading account is the size of the position you take in your trades.

The forex market, in particular, is a venue where large bets can be placed thanks to the ability to leverage positions and a 24-hour market that always provides liquidity. Leverage is one way many traders try to make big returns on a relatively small investment, 100:1 leverage is quite common.

While entering large leveraged positions does provide the possibility of generating large profits, it also means exposure to more risk.

So just how should you go about trading for meaningful stakes? First of all, all traders must assess their own appetites for risk. You should only trade the markets with money you can afford to lose- meaning if you did lose it all you wouldn’t be bankrupt. Secondly, you must define how much you are prepared to lose on any single trade- a good rule is to never risk more than 1% of your account per trade, meaning if you have $10,000 available you would only risk $100 per trade, trading 1 mini lot (0.10).

By trading with such low risk, you will be able to make better trading decisions when it matters, and take advantage of opportunities you may have otherwise missed if you were exposed to too much risk.

Combining low risk trading with a deep understanding of fundamental news is the key to success in the forex markets.

This is because low risk allows you to make wiser decisions based upon research and rational thought- for example, if you are in a USDJPY position down 100pips, this should hardly affect the way you are thinking about that trade, after all 100pips is only 1% of your account.
Also knowing the fundamental reasons behind each currency is key, with the Bank of Japan flat out with their QE program and the Federal Reserve tapering theirs- you should easily have the conviction to hold the USDJPY trade knowing that it will come back, avoiding taking that loss.

This also allows you to trade elsewhere without fear of being too exposed to the market.


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