somrat4030
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Forex trading position size explain, by forex forum.
Position sizing points to the total number of units held by a trader or investor in certain security. An investor's risk-taking abilities and account size have to be necessarily considered by a financial planner or advisor when deciding on the position sizing.
What is Position Size in Forex?
To identify the maximum risk size of trade, you should find the distance between your stop loss and your entry. Therefore, you should determine the pips and the lot size to calculate the ultimate risk in the dollar value. Risk per trade in currency value helps the trader to stay consistent with the maximum tolerable losses. Therefore, you have options to close your position when you see this going further towards the stop-loss levels.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.
Importance of Forex Position Calculator
If you are a trader, you should know that one of the most important tools that you should always bring is the forex position calculator. It is instrumental in managing every single risk that can be encountered along the way. Position sizing is recognized as the key towards better risk management that prevents the scenario wherein your foreign exchange account has to be closed just because you have made a major mistake within a single trading cycle.
Technology has worked for the betterment of the forex position calculator. Years back, experts will need a few minutes to come up with and calculate the desired parameters. But now, all you have to do is to supply the required information and you will get the result within seconds. The resulting parameters are an approximation of the amount (in units of the desired currency) to purchase or to sell in order to take control of the maximum risk that can be held per position.
Traders' position size is determined by their size-types lot. Those size ranges from a standard lot is 100,000 units, a mini lot is 10,000 units, and a micro lot is 1,000 units and the number of lots when they buy or sell.
To help you get the right position size in forex trading, here are the things that you have to consider.
1. The Account Risk Limit per Trade
In deciding the account risk limit per trade you need to set the percentage or dollar amount limit for each trade. Commonly, professional traders risk 1% or less from their account.
For instance, if your trading account has $10,000 with a 1% limit, then you can risk $100 per trade. While, if you use a 0.5% risk limit, then you risk $50 per trade.
2. Trade Risk
The investors should then fund out as to where they should place their stop-loss order pertaining to trading a particular asset or security. If a trade is trading shares, then the trade risk is the difference between the stop-loss price and intended entry price.
For instance, if a trade is willing to purchase a share at Rs 180, and likes to place the stop-loss order at Rs 150, then the trade of that trader is Rs 30 per share.
3. Introduction to lot sizes and pip values
In Forex trading, the position size is determined by the amount of "Lots" that you trade. There are 3 different Lot types in Forex trading: Standard Lots, Mini Lots, Micro Lots
Depending on which size you trade, the pip value changes. Here are a few examples:
1 Standard lot >> 1 pip is $10 worth
1 Mini Lot >> 1 pip is $1 worth
1 Micro Lot >> 1 pip is $ 0,1 worth
10 mini lots equal 1 standard lot and 10 micro lots are the same as 1 mini lot.
Pip-values differ for different currency pairs. Here is a list of currency pairs and how their pip value changes for different currency pairs
4. Determine Position Size for a Trade
The ideal position size can be calculated using the formula:
Pips at risk * pip value * lots traded = amount at risk
In the above formula, the position size is the number of lots traded.
Let's assume you have a $10,000 account and you risk 1% of your account on each trade. Thus your maximum amount to risk is $100 per trade. You're trading the EUR/USD pair, and you decide you want to buy at $1.3051 and place a stop loss at $1.3041. That means you're putting 10 pips at risk ($1.3051 – $1.3041 = $0.001). Since you've been trading in mini lots, each pip movement has a value of $1.
If you plug those numbers in the formula, you get:
10 * $1 * lots traded = $100
If you divide both sides of the equation by $10, you arrive at:
Lots traded = 10
Since 10 mini lots are equal to one standard lot, you could buy either 10 minis or one standard.
Position size = (Account size ×% risk per trade)/ (stop loss in pips × pip value)
What you should know is that position size varies with different lot sizes or account type.
The size on a standard account cannot be the same as that of a mini account nor that of a micro account.
What you should note first is that for all pairs where the USD is a quote/counter currency in the pair, e.g EUR/USD, pip value is the same as indicated;
1000 lot (micro) is worth $0.1 per pip movement. A 10,000 lot (mini) is worth $1. Whereas 100,000 lot (standard) is worth $10 per pip movement.
If the USD is not the quote currency then these pip values will vary slightly.
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.
The Importance of Position Sizing in Forex Risk Management
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.
BEWARE OF USING EXCESSIVE LEVERAGE
Because of the nature of forex trades – which involve an exchange of initially equivalent assets rather than an outright purchase or sale of a stock or commodity – traders can sometimes leverage their margin deposits up to a ratio of 500:1 with some online retail forex brokers. (In the U.S. the maximum leverage is 50:1 for majors and 20:1 for minors.)
This means that a margin deposit of $1,000 can allow you to control a trading position of as high as $500,000. Nevertheless, taking advantage of this high leverage ratio can be very risky.
Clearly having access to so much leverage allows a trader to control a considerably larger position from which a proportionally greater profit can be had.
Computing for the exact amount that you are capable of risking is essential especially if you are adhering to a definite foreign exchange money management strategy. Such strategies assure that you will not be losing very large amounts. In adjusting your Forex position, experts advise to do it manually. This way, you will avoid losing the deal of cash that you don't want to lose. With the aid of a forex position calculator, you can truly practice being a highly organized forex trader – the key towards being a respected and successful professional foreign exchange trader.
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