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Position Sizing in Forex Trading
Written by: PaxForex analytics dept - Tuesday, 14 March 2017 0 comments
With the advent of the Internet, forex trading which was once the exclusive domain of large banks, funds, corporations and high net worth individuals is now available to anyone with an Internet connection and a small amount of money to trade with. While the possibility of making large sums in the forex market exists due to the considerable leverage offered to traders by many online brokers, this feature could also be a recipe for disaster for traders unfamiliar with the significant risks involved in forex trading.
Appropriate position sizing represents one of the most important components in the successful management of the funds deposited in a forex trading account. A suitable determination of the size of a trading position relative to the size of the trading account, the proportional risk incurred relative to the expected chances of the trade’s success, and the market risk given volatility levels are essential components of a sound trading plan. A proper money management and position sizing plan could prevent the trader’s account from becoming severely compromised by an unexpected adverse market move.
It has been said that the single most important factor in building equity in your trading account is the size of the position you take in your trades. In fact, position sizing will account for the
quickest and most magnified returns that a trade can generate. How big or small your position is should not be a random decision. Position size is precisely calibrated for the risk on the trade and your personal risk limit. Position sizing can make or break a trader.
A trader must be able to accept losing on any given trade and to be able to survive taking losses on ten consecutive trades. Since those ten consecutive losses should not exceed a total 25 percent drawdown, this means that no more than two percent of the portfolio should be put at risk on any particular trade. Once the trader has figured out how much they are comfortable losing, a stop loss level for each trade should be determined and either placed in the market as an order or watched carefully.
You should always put enough in any trade to take advantage of the largest position size that your own personal risk profile allows while ensuring that you can still capitalize and make a profit on favorable events. It means taking on a risk that you can withstand, but going for the maximum each time that your particular trading philosophy, risk profile and resources will accommodate such a move.An experienced trader should stalk the high probability trades, be patient and disciplined while waiting for them to set up and then bet the maximum amount available within the constraints of his or her own personal risk profile.