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Undergraduate Senior – Advanced Online Forex Trading Course

Position Sizing Details Overview and How to Calculate Position Sizes

Position Sizing Details Overview and How to Calculate Position Sizes

Position Sizing Details Overview and How to Calculate Position SizesNow that we know the problems with trading using leverage, let’s focus on using proper position sizing. It’s crucial for traders to master this skill as it helps manage risk effectively. Before trading with real money, make sure to learn about position sizing and how to calculate it accurately.

Position size in trading means a trader’s investment in the number of units. Investors typically use position sizing to understand their buying capacity in terms of units of currency. Eventually position size in forex helps traders to boost the return while also control the risk.

The good thing is that it’s easy to keep the position size within your risk comfort level. You just need to follow a few steps to calculate the position size, which depends on the currency pair you’re trading and your account denomination.

All you need are just 5 pieces of information before you get your calculations going:

  • Equity or account balance
  • Currency pair you are trading
  • The amount or percentage of the account you are willing to risk
  • Stop loss in pips
  • Conversion currency pair exchange rates

Seems quite easy. Isn’t it?

Calculate Position Size in Forex

You need to determine the right amount of currency units to buy or sell to manage your risk properly. This is what means calculate position size forex. Correct position size is necessary to manage risk as well as maximizing the potential return on your forex trading. Here’s a step-by-step guide to calculate Forex position sizing:

  1. Determine your risk tolerance: First of all, make sure you decide your trading account’s percentage you want to risk on each trade. However, a common rule of thumb is, you should not risk more the 1-2% of your account.
  2. Calculate the dollar amount at risk: Next multiply the risk tolerance percentage by the account balance. For instance, you have a $15,000 balance in your account and you are ready to risk up to 1% per trade. So, the risk will be $150.
  3. Identify the stop loss level: Fix your exit level if the price moves against your expectation. This is what your stop loss level.
  4. Calculate the pip value: The pip value is the smallest price movement in the forex market, usually the fourth decimal place (0.0001) for most currency pairs. To calculate the pip value, divide 1 by the current exchange rate of the currency pair you are trading. For example, if you are trading EUR/USD and the current exchange rate is 1.2000, the pip value would be 0.0001 / 1.2000 = 0.00008333.
  5. Determine the number of pips at risk: Subtract the entry price from the stop loss level (for a long position) or the stop loss level from the entry price (for a short position) to find the number of pips at risk. For example, if you are entering a long position in EUR/USD at 1.2000 with a stop loss at 1.1950, the number of pips at risk would be 50 pips (1.2000 – 1.1950).
  6. Calculate the position size: Divide the dollar amount at risk by the number of pips at risk and the pip value. Using the previous example, if you are risking $100 with a 50-pip stop loss and a pip value of 0.00008333, the position size would be $100 / (50 * 0.00008333) = 24,000 units.

You can use position sizing calculator to calculate the position size accurately.

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