It’s your money on the line every time you take up a trade. So I guess that makes how much you could invest on a single trade a pretty big deal for any trader. This is why you can’t simply rely on a fixed position size for every trade. Or whip up something based on how confident you’re feeling about a particular one.
Position sizing is how many units you’re willing to trade in a single trade. And it has to be a thought-out calculated amount after taking several factors into consideration. You have to make sure that you could make the most out of every open position without risking too much.
One of the main factors influencing position sizing is account risk. As a trader, it is important for you to set the account risk limit for each trade. Most traders only risk less than 2% of their trading capital per trade. For example, if your trading capital is $15,000 and you have a 2% risk limit, then your account risk for each trade is $300. So even if you lose 10 trades in a row, your overall loss is only 20% of your account capital. Account risk thus acts as a guideline that helps you limit the risk on every trade you take.
Next is trade risk, i.e. how many pips you are risking on a single trade. It is the difference between your entry point and the stop-out level. If you’re buying EUR/USD pair for 1.3432 and your stop-out level is at 1.3422 then you’re risking 10 pips for the trade. As you know, for micro lot 1 pip = $0.10, mini lot 1 pip = $1 and for standard lot 1 pip = $10. In this scenario, let’s say we are trading 1 standard lot, then pip value = $100.
If you have to calculate the ideal position size for a trade you take up, you can refer to the following equation.
Trade risk * pip value * lots traded = Account risk
So if you have an account size of $20,000 and your account risk is 2% when you’re buying EUR/USD for 1.4431 and stop-out level at 1.4421, then for a mini lot:
10*$10*lots traded = $400
Lots traded = 4
Therefore, it could be appropriate to buy four mini lots for the above trading position. Thus with this formula, traders can calculate the ideal position size for any trading scenario. And as we said it’s always better to make informed decisions than speculate while trading.
Risk Warning: This material is considered a marketing communication and does not contain, and should not be construed as containing, investment advice or an investment recommendation or, an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. Trust Capital TC Ltd does not take into account your personal investment objectives or financial situation. Trust Capital TC Ltd makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of Trust Capital TC Ltd, a third party or otherwise.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81.48% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Trust Capital TC does not offer Contracts for Difference to residents of certain jurisdictions including the USA, Iran, and North Korea. Please consider our “Risk Disclosure“.