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# Position Sizing & Money Management

An important aspect of forex trading success is taking the correct position size on each trade. A trader position size or trade size is considered more important than your entry or exit point especially in forex day trading. You might have the best trading strategy but if you do not have proper trade size, you will end up facing risks. Finding the proper position size will keep you within your risk comfort level is relatively safe.

We can divide the risk into two parts −

• account risk

Follow these steps to get the ideal position size, irrespective of the market conditions −

Set aside the percentage amount of your account you are willing to risk on each trade. Many professionals and big traders choose to risk 1% or less of their total account on each trade. This is as per their risk taking capacity (here they can deal with 1% loss & the other 99% amount still remains).

Risking 1% or less is ideal but if your risk capacity is higher and you have a proven track record, risking 2% is also manageable. Higher than that of 2% is not recommended.

For example, on a 1,00,000 INR trading account, risk no more than 1000 INR (1% of account) on single trade. This is your trade risk and is controlled by the use of a stop loss.

### Step 2: Determine pip risk on each trade

Once your trade risk is set, establishing a stop loss is your next step for this particular trade. It is the distance in pips between your stop loss order and your entry price. This is how many pips you have at risk. Based on volatility or strategy, each trade is different.

Sometimes we set 5 pips of risk on our trade and sometimes we set 15 pips of risk. Let us assume you have 1,00,000 INR account and a risk limit of 1,000 INR on each trade (1% of account). You buy the USD/INR at 66.5000 and place a stop loss at 66.2500. The risk on this trade is 50 pips.

### Step 3: Determining your forex position size

You can determine your ideal position size with this formula −

Pips at Risk * Pip Value * Lots traded = INR at Risk

It is possible to trade in different lot sizes in forex trading. A 1000 lot (called micro) is worth \$0.1 per pip movement, 10,000 lot (mini) is worth \$1, and a 100, 000 lot (standard) is worth \$10 per pip movement. This applies to all pairs where the USD is listed second (base currency).

Consider you have \$10,000 account; trade risk is 1% (\$100 per trade).

• Ideal position size = [\$100 / (61 * \$1)] = 1.6 mini lots or 16 micro lots

Creating and maintaining a forex trading spreadsheet or journal is considered a best practice, which not only helps an amateur forex trader but also a professional trader.

### Why do we need it?

Not only we keep track of our trades with the help of spreadsheet, we keep track of trends with different currency pairs, day after day, without layers of technical indicators.