Trading with the proper position size on each trade is key to successful forex trading. Position size is how many lots (micro, mini or standard) you take on a particular trade. The ideal position size is based on both account size, the setup of each trade, and the pair being traded. Based on these factors, the ideal position size could be different for each trade. Learn how to calculate your ideal position size in a few easy steps.
Why Position Size Matters
Position size is a key component in successful forex trading. Risk too much and a few losing trades can wipe out your account. Even best traders have losses.
If your position size is too small, then your account won’t grow and you won’t meet your financial goals. Your performance will be less than what it could be if you were trading with the ideal position size.
Forex Position Sizing In 3 Steps
- Determine how much of your account you want to risk on each trade, in a percent. It’s recommended traders don’t risk more than 1% of their account per trade, or 2 to 3% maximum. Based on your account size, this percentage lets you know the dollar amount you can risk. Assume you have a $5,000 account, and are willing to risk 1% per trade. 1% of $5,000 is $50, so you can risk $50 per trade. Do this calculation for your current account balance, then proceed to the next step.
- Next, determine the pip risk on the trade you are considering. The pip risk is the difference between your entry price and your stop loss order price. If you use the same pip risk all the time–for example you always place a 10 pip stop when day trading–then this step is easy because you already know the number of pips at risk. If you adjust your stop loss for market conditions (like I do), then your pip risk may vary from one trade to another. Once you know the pip risk of your trade, move to the next step.
Figure 1. Difference Between Entry and Stop Loss Determines Pip Risk
Source: My forex broker FXopen.
- Now determine your ideal position size using the above data. Use the formula:
$ at Risk / (Pip Risk x Pip Value) = Position size in lots
“$ at Risk” is the amount from step one.
“Pip Risk” is the value from step two.
“Pip Value” is a known variable; for example, each pip is worth $1 in the EURUSD when trading a mini lot.
Plug in the data to find how many Lots you can take (position size) if your stop loss is 10 pips.
$50 / (10 pips x $1) = 5 mini lots
Or for a trade with 38 pips of risk.
$50 / (38 pips x $1) = 1.3 mini lots (or 13 micro lots)
We know the position size is in mini lots because the pip value we used in the calculation is for a mini lot. To calculate the position in micro lots, use the micro lot pip value.
$50/ (10 pips x $0.10) = 50 micro lots
Input your own dollars at risk, pip risk, and pip value into the formula to determine the proper forex position size on each trade.
Different Pip Values
When you are not trading the EURUSD (or any currency where the USD isn’t listed second), or your account is a different currency than US dollars, pip values become a bit more tricky. The Forex Stats page has a tool you can use to calculate pip value based on different account currencies. If the chart doesn’t show the currency you want to trade, XM has a good pip value calculator. For a detailed explanation of pip values, or to learn how to calculate pip values yourself, see Calculating Pip Value in Different Forex Pairs.
Forex Position Size Considerations
When calculating your ideal forex position size, be aware that the pip value can vary by currency pair. For currency pairs where the USD is listed second, the pip values are fixed at $10, $1 and $0.10 for standard, mini and micro lots respectively. For pairs where the USD isn’t listed second (like in USD/CAD) you’ll need to look up the pip value to use in this formula.
As your account value rises and falls, your position size is affected. Use the forex position size formula every time you trade, so your trades are always aligned with your current account size and the pip risk of the trade.
If using MetaTrader4 (MT4) or MT5 to trade, you can check how much you have at risk on each trade by clicking on Tools>Options>Charts>Show trade levels. Whenever you take a trade with a stop loss, hover your mouse over the stop loss line on your chart to see the dollars and pips you have at risk. That dollar amount should be 1% or less of your account value, or whatever percentage you chose. This is a good way to spot-check trades to make sure you aren’t risking too much or too little. This is especially helpful when dealing with currency pairs with weird pip values. After placing every trade, hover over that stop loss line to make sure you are actually risking what you think you are.
Having the proper position size is key to forex trading success. Risk too much on each trade, and you will deplete your account in a hurry with just a few losing trades. Risk too little and your account won’t grow. Use the formula to make sure you have the ideal position size for your account size and the trade you’re taking.
By Cory Mitchell, CMT
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