Position Sizing

Yaser Rahmati | یاسر رحمتی

Introduction

Position sizing is a critical aspect of risk management in forex and futures trading. It determines the number of units (lots) you should trade based on your account size and the amount of risk you are willing to take on each trade. Here’s a step-by-step guide to understanding and implementing position sizing for risk management:

Step-by-Step Guide to Position Sizing

1. Determine Your Account Size

• Know the total capital you have available in your trading account.

  • Example: $10,000

2. Set Your Risk Tolerance

• Decide the percentage of your account you are willing to risk on a single trade. Commonly, traders risk 1-2% per trade.

  • Example: 1% of $10,000 = $100

3. Identify the Trade Setup

• Determine the entry price, stop-loss price, and take-profit price for your trade.

4. Calculate the Pip or Point Value

• For forex, a pip is the smallest price move that a given exchange rate can make.

  • Example (Forex): If EUR/USD moves from 1.1000 to 1.1001, it has moved 1 pip.

• For futures, points are used instead of pips.

5. Calculate the Position Size

• Forex Position Size Formula:

Position \; Size (in \; lots) = \frac{Account \; Risk ($)}{(Stop-Loss (pips))*(Pip \; Value (per \; lot))}

• Futures Position Size Formula:

Position \; Size (in \; contracts) = \frac{Account \; Risk ($)}{Stop-Loss (points)*Point \; Value (per \; contract)}

Example Calculation for Forex:

• Account size: $10,000

• Risk per trade: 1% of $10,000 = $100

• Stop-loss: 50 pips

• Pip value: $10 per lot for a standard lot

$$Position \; Size \; (in \; lots)=\frac{100}{50 \times 10}=0.2 \; lots$$

Example Calculation for Futures:

• Account size: $10,000

• Risk per trade: 1% of $10,000 = $100

• Stop-loss: 2 points

• Point value: $50 per contract

$$Position \; Size (in \; contracts)=\frac{100}{2 \times 50}=1 \; contract$$

6. Adjust for Leverage (if applicable)

• Leverage allows you to control a larger position than your account balance. However, leverage also increases risk.

• Ensure you understand how leverage affects your position size and risk.

7. Execute the Trade

• Enter the trade with the calculated position size.

• Use appropriate stop-loss and take-profit orders to manage risk and potential profit.

8. Review and Adjust

• Regularly review your trades and risk management strategy.

• Adjust your risk tolerance and position sizing rules as your account grows or market conditions change.

Keywords

Position sizing, risk management, forex trading, futures trading, account size, risk tolerance, stop-loss, take-profit, pip value, point value, leverage, lot size, contract size, trade setup, entry price, position size formula, trading strategy, market volatility, capital preservation, trading discipline