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Tips on Managing and Calculating Position Size

Determining your position size is an integral step to trading. To enjoy ‘longevity’ trading the market, prudent position sizing is a must.

We call the method here a Risk-Adjusted Position-Sizing that is based on fixed loss per trade. This article is a must-read if you:

  1. Are good at trading but somehow always lose big.
  2. Can score 3-4 winners each time but end up with net loss because of 1 loser.
  3. Apply uneven positioning sizing to your trades.
  4. Have the uncanny ability to overweight one single loser and underweight multiple winners.

This is a part of the Tflow® course program.
 

How to determine Position Size?

Ask yourself the below questions.

  1. How much is your current capital?
  2. Percent of capital you’re willing to risk for this trade. (x% multiply by capital)
  3. Amount of risk (SL) for this trade.

To calculate your maximum possible position size, take Percentage of capital risk (#2) and divide by Amount of risk for the trade (#3).

Note that for the calculation: 0.1 = micro contracts, 1.0 = mini contracts, 10.0 = standard contracts.

 

Example #1

There is a trade on EURUSD with a determined SL of 50 pips from entry.

  1. How much is your current capital? $10,000
  2. Percent of capital you’re willing to risk for this trade. 2% x 10,000
  3. Amount of risk (SL) for this trade. 50pips

Therefore for this particular trade, 200 / 50 = 4, I can trade a maximum of 4 mini contracts for this trade.

 

Risk, it adds Up!

It is important to note that you should always have a total amount of your total capital you are willing to risk for all your trades combined.

Note: 10 trades of 2% each means you’re risking 20% of your total capital if you add up all your trades.

Assuming, at any point I’m only willing to risk a maximum of 5% of my total account and I have 3 trades I wish to take then I have to allocate my risk per trade. Below are some examples.

  1. Split 5% up as 2%, 2% and 1%
  2. Split 5% equally (almost) 1.7%, 1.7%, 1.6%

Calculating your position size in this way, you should not exceed your allocated capital.

 

Example #2

Assuming the below conditions.

  • Current capital = $13,520
  • Total percentage to risk for all trades = 5% of total capital

I have 3 trades to enter.

With calculation based on the above information, our position size for each pair should be as follows.

  • AUDUSD
    • (1.6% x 13,520) / 78 = ~2.7 minis
  • USDJPY
    • (1.7% x 13,520) / 88 = ~2.6 minis
  • WTI
    • (1.7% x 13,520) / 201 = ~1.1 minis

Hence, assuming that we profited on AUDUSD and USDJPY and got stopped out of WTI.

  • $216 + $260$222 = $254
  • In the end, we should reflect a profit of $254.

 

Position Sizing helps to keep you trading longer

By calculating your position size in this way and being aware of the amount you’re risking per trade, this will help to prevent over-trading and improve your chances of overall success in trading.
 


Last time, many things that I wanted were just dreams, now I see them as possibilities. I’m looking forward to own pent-house suite in Manhattan overlooking Central Park because forex trading with Tflow® makes it possible. Find me on Google+

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5 thoughts on “Tips on Managing and Calculating Position Size”

  1. Chee Meng Lai says:

    Jerome,
    Thanks for the refresher. Hope to be back soon from assignment in China.

    Regards,
    Cheemeng

  2. Vincent Wee says:

    Should we take the currency pip value into considersation? In your USD/JPY exmaple, the calculated lot size is 3.109 minis lot (round up to be 3 minis) if we included the pip value into calculation.

    1. Jerome Lee says:

      Not exactly. But to paraphrase and extrapolate on your question. If you wish to be very precise, you should take into account your based funded currency as well as the secondary currency you’re trading in to ensure you account for exposure.

      Example
      • Account of SGD10,000 and you are willing to risk 10% of your account (for easy calculation) which would be SGD1,000.
      You wish to trade USDCAD. Thus CAD is your secondary currency. As your PL is calculated in CAD before conversion back to your funded currency base, this means to be accurate you should calculate your RISK in CAD. Therefore, converting SGD1,000 to CAD at the rate of 1.1 gives you approximately CAD$900.
      If you feed this back into your calculation, then your maximum lot size for a trade in USDCAD with a 50pip SL would be 1.8 standard lots.

      In the above post, I based my calculations off a USD funded currency base.
      Also note for JPY:
      1 pip on 1 micro lot = JPY10
      1 pip on 1 mini lot = JPY100
      1 pip on 1 standard lot = JPY1000

  3. Sang Keng Alan Leong says:

    Thanks Jerome! Very useful reminder.

  4. Vincent Wee says:

    Thks Jerome

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