A position calculator proves to be very useful in determining how much a certain trader would be willing to invest or risk for every single deal or trade that he or she will encounter in the foreign exchange market. This process is known as position sizing.
Position sizing approaches can be different if you are dealing with an active trading and if you are taking into consideration investing for a longer period. For short term active trading, the function or purpose of position sizing would be limited to how much investment you are willing to lose just in case the odds will not be in your favor. But for investments that run over a longer period, position sizing can be a little more complicated.
The first thing that you should do in forex trading is to decide the level of tolerance to risk. This should be part of your strategic plan. Once you have come up with a strategic plan, make sure that you stick to it. Here’s the catch: not everyone is capable is sticking to a plan. Many traders get tempted when they are presented with juicy offers.
In order for you to be constantly reminded, it is recommended that you have your own position calculator in your own computer. This way, you can always compute for the essential parameters based on the conditions you have set for yourself. This is a great way of reminding yourself that you have drafted your own plan and the best thing to do in order to obtain success is by sticking to it.
Inconsistency never pays off. Investing much on a single trade can be regretful because usually it can lead to a disaster. Usually, account drawdowns result from such one-time big time investments that never pay off. By keeping yourself aware of the amount of risk that is bearable for you, you can have a more stable investment. If you will ask tried and true traders, their methods of computing risk or maximum bearable risk can vary depending on the position and other preferred parameters. But most of them use a position calculator in order to assure that the computation is accurate and reliable.
The following is the formula for the calculation of a position size:
Position Size = (Total Value of Account * Percentage Portfolio Risk)/Stop Loss Value in $
This is the same formula being followed by any position calculator. Using such tools can save you time and money because you no longer have to set up the equation in order to come up with an accurate computation. With the calculator, you can get the result instantly.
No matter how confident you are of the trade, you should not overinvest. As mentioned earlier, the key towards being effective in the field of trading is consistency. Indeed, the system you are using should be something to be confident about but you should always be ready to face, manage and turn risks into opportunities. This can only be done by being consistent, maintaining a fix amount of risk in mind, and by constantly checking the amount of risk by using the position calculator.