Trader’s position size is more important than the entry and exit points when the day trade foreign exchange rates (forex). Even with the world’s best forex strategy, you will not make much of a profit without the right position size. Thus, determining the position size in forex trading is essential.
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.
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.
Unlike trading variables that can change, account risk should always be kept constant. Never risk 5% on one trade and risk 2% or 3% on the next trade. Choose a percentage, then stick with it. You can only change the percentage when your percentage exceeds the 1% percentage limit.
The Pip Risk on a Trade
After you set the risk limit, now you have to focus on the real trade. In deciding the pip risk, you need to calculate the difference between the entry point and the point of your stop-loss order.
A pip defines as the smallest part of currency price changes. Mostly a pip in currency pairs is 0.001 or 1/100 of a percent. Meanwhile, a stop loss is a tool that allows you to exit the trade without a big loss. You will exit the trade whenever the price hits the loss amount your set before you make your entry.
The pip risk, on the other hand, varies according to your strategy and price volatility. Sometimes, a trade can have 5 pip risk, while the other can have 15 pip risk.
When you make a trade, always consider your stop-loss and entry point location. You have to put your stop loss close to your entry point, yet, not so close in order for you to still gain profit.
The Pip Value for a Trade
The pip value for different lot sizes is fixed if your account is funded with the same currency as the quote currency (the second currency) of your trading. For instance, your account is funded with US dollar and your quote currency is also US dollar, then, the pip value is $0.10 for a micro lot, $1 for a mini lot, and $10 for a standard lot.
But, if your account is funded with dollars, while your quote currency is not a dollar, then you need to multiply the pip value with the exchange rate of the US dollar with that quote currency.