Position Sizing: An Approach to Determining Risk in Forex

It is believed to be self-explanatory that the most important of all factors in the bid to build equity in one’s trading account is the size of the position they take in their trades. Position size is what really determines the enormity of the monetary value which a trade can generate in the forex market.

Level of Risk Determination

Not everybody is somewhere around the neighborhood of stomaching the occurrence of watching their funds lessening off. Some people have more risk health than some other people, and that is what should be assessed by a trader before making their trade decisions. It is always said that one should “only trade the forex with the money they can afford to lose”. It is rationally expected of a trader to determine the exact amount they can afford to lose before taking a trade decision, regardless of the level of certainty a trade is perceived to likely out to be. Suppose a trader has equity of $5000 and are willing to enter a trade with a 1% level of risk (depending on their risk health), then they will have the mindset to be willing to part with $500, if the trade turned out the other way and their stop loss is triggered, regardless of their affirmations about the direction of the market. It is though advisable to keep one’s level of risk really low. However, in some cases, a trader could choose to raise the level of their risk a little bit, depending on their Risk to Reward Ratio, a concept whose level of certainty can be ascertained from the reliability of the trading strategy or the expected performance of the trading system a trader is using.

Furthermore, in avoiding the risks associated with calculations in forex trading, it is advisable for a trader to calculate their risk value in terms of pips and not in terms of currency before getting into a trade, plus projecting the value of loss one is prepared to lose and this suggests the use of stop loss. Here is a practical example; a trader had $5000 in their forex account as equity and had defined their entry point in a trade. With the willingness of subjecting 3% of the equity to risk, using a standard lot size which would equal to $10 per pip, then the stop loss spot would be 15 pips away from the entry point. The eventuality of the trade if it was a loser would then record a shortage of $150 on their equity. The bottom line is just the predetermination of a loss before its occurrence which is financially intelligent because it can never be more than the predetermined value.