Forex Trading - Maximizing Profit Potential By Properly Sizing Positions

Soruce: Fx360.com

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Most people begin trading by risking one lot (or mini lot) for each trade. Let's assume that the beginner already has learned to plan their entry and exits ahead of time. Regardless of the magnitude of the trade, they will frequently use the same size position for every trade. Therefore, a trade with a 200 pip stop will carry 5 times the risk of a trade that has a 40 pip stop. Therefore, an uncontrolled variable can greatly adjust results. To eliminate this variable, we simply adjust our position size so that every trade carries a similar amount of risk. It is probably best to risk one to three percent of the account balance in order to have a reasonable level or risk on each trade.

Calculating position size is easy. First, take the account balance and multiply it by your predetermined risk level. For our example, let's say that our trade plans to risk three percent of their account on each trade. Let's also suppose that our trader has a $100,000 account balance.

$100,000 x 3% = $3,000

Therefore, our trader will look to risk approximately $3,000 on each trade. Next, we have to calculate the amount of risk per lot for each trade. This can be quickly determined by drawing the value calculator from the entry to the stop. Let's say that our trade utilizes mini lots (10,000 unit lot size) so they are able to precisely risk 3% each time. Let's look at the following example to see how this works in the real world. Example 1 is the trade on the Daily Chart, and example 2 is the trade on the 15min Chart.

On example 1, we see that the distance between the entry and the stop is 230 pips. Therefore, on the EUR/USD the risk per mini lot is $230. Then our trader divides the risk per trade ($3,000) by the risk per mini lot for this particular trade ($230).

$3,000/$230= 13.04

Our trader rounds down to 13 mini lots for this trade. The idea is to get as close to risking 3 percent of the account as possible without going over 3 percent.

On example 2, we see that distance between the entry and the stop is 20 pips. Therefore, on theEUR/USD, the risk per mini lot is $20. Our trader once again divides the risk per trade ($3,000) by the risk per mini lot for this particular trade ($20).

$3000/$20= 150

For this trade, our trader will trade 150 mini lots. It quickly becomes apparent that example 2 requires a much larger position in order to keep each trade weighted equally. Let's take a look at the results. Example 1 was stopped out with a loss of $2990 ($230 risk per mini lot multiplied by 13 mini lots). Example 2 reached the profit target with a gain of $6,450 ($43 profit potential per mini lot multiplied by 150 mini lots). The result is a net gain of $3,460 or 3.46% of the initial account balance (assuming we began with the same account balance for each trade).

If the trader had not properly adjusted position sizes and used 1 standard lot (or 10 mini lots) for each trade, example 1 would have resulted in a 230 pip loss and example 2 would have resulted in a 43 pip gain. The net result would be a loss of $1870 or 1.87% of the initial account balance. The random variable of trade magnitude was not controlled, and a pretty large price would be paid for it. There could also be times where the longer term trade won and the shorter term trade lost, but there is no way to control that variable. Therefore, we eliminate it by adjusting our position size so that each trade carries roughly the same weight.

• • 
    
  • Daily Chart - Example 1: Longer term trade that was stopped out.
  • 
    
  • 15min Chart - Example 2: Shorter term trade that reached our profit target.
• 
  
  

Proper calculating your Position Sizing.

No of Lots = $Account Size x Risk % / Stoploss x $Value per pip

Email: forextradingforexsite(at)gmail.com for the automatic calculation of the no of lots per trade excel sheet. Made things easier for you.