## Effective Risk Management: Calculating and Managing Position Sizes

Sep 20 • Forex Trading Articles, Forex Trading Strategies • 507 Views • Comments Off on Effective Risk Management: Calculating and Managing Position Sizes

The key to long-term Forex trading success is effective risk management. An important part of risk management is understanding how to calculate and manage position sizes. Even though it seems complex, once you learn its principles, it’s quite simple. Position sizing is an important part of risk management, and this article will explain how to calculate it and use it effectively.

## The Importance of Position Sizing

A successful forex trading strategy includes knowing how much of a particular currency to buy or sell in a trade. Position sizing is key to managing your trading risk.

Position sizing is crucial for several reasons:

• The tool makes sure you don’t overexpose yourself to any one trade by helping you manage your risk.
• Traders can recover from losses since they risk only a small portion of their account.

## Position size calculation

Risk tolerance is the first step in calculating your position size. It is generally not recommended to risk more than 2% of your trading account per trade.

Here’s an example to comprehend this better. Let’s say you have \$10,000 in your trading account and decide not to risk more than 2% on any trade. If you lose \$200 on a single trade, you’ve only lost 2% of \$10,000.

The next step is determining the stop loss amount you will tolerate before closing the trade. For example, the trade will be closed if you set a stop loss of 20 pips.

You can calculate the position size by dividing the amount you wish to risk (\$200) by the stop loss (20 pips), which gives a risk of \$10 per pip.

Finally, consider the pip value for the currency pair you are trading to convert this risk into a position size. The pip value for standard lots is generally \$10 per pip. For mini lots, it is \$1 per pip; for micro lots, it is \$0.10 per pip.

For example, if you wish to trade ten mini lots or a hundred micro lots with a \$10 pip risk, you should trade one standard lot.

## Position size management for effective risk management

### Use Stop Loss Orders

A stop-loss order is the best way to manage your risk. They limit your losses when the market moves against you.

### Consider the volatility of the market.

During periods of high volatility in the forex market, you may want to reduce the size of your position to limit any loss.

### Maintain a balanced portfolio.

Be sure to diversify your trades to minimize the risk of investing in a single currency pair.