How important is trading the right position size? Does it have an impact on your trading account in the long run? Is this something you should be thinking about? In this blog we answer all these questions and more.
Let’s start from the basics.
What is position size?
As you might already know, there are different lot sizes in forex trading. These are ranges of units of currency that can be traded at a time.
This is so traders aren’t bound to stick to certain amounts. They can decide the amount they want to trade depending on their account size.
It helps traders manage risk and make sure they are not getting into trades that they cannot afford.
Is it important?
From the above explanation alone you can probably tell what the answer is going to be.
Yes, selecting the correct position size is incredibly important.
It is the main thing that will help you figure out if you are trading responsibly and if your account can take those trades.
The thing to keep in mind when deciding your position size is to make sure that you are not being too hopeful.
Oftentimes new traders are just thinking about the best case scenarios and how much they will be able to make if this or that happens. The ‘this or that’ is often that which rarely happens and which is a product of naively hopeful thinking.
You need to think about what will happen if things go wrong too. You cannot trade professionally just hoping to get lucky. Therefore, it is imperative that you think about what will happen if things go wrong.
The bigger your position size, the more of your trade capital you are exposing.
Tips for correct position sizing
Given below are a few tips that might help you make sure that you are going for the correct position size for your account.
When going in to a trade, consider the following.
1. Can you identify your account’s limits?
Do you know how much risk is safe for your account? If not, you should.
Ideally, as advised by professional traders you should not be risking more than 3% of your account for any trade. A lot of traders even insist on sticking to 1%. That means only risking 1% per trade. However, that is not possible for everyone to do especially for those who are just starting out and have smaller accounts.
If you want to push it to 5% risk per trade do that, but make sure you know what you are doing. Don’t wing it.
2. How many times can you do this?
This is kind of an offshoot of what has been discussed above.
Think about the position size you are planning to trade. Can you trade this size consistently? If not, it means you are probably placing more trust in this trade. Do you have enough cause to be doing this?
It is very important in trading to know what you are doing and why. Know your intentions.
Successful traders are those who are consistent. If you are planning to do it long term, make sure you create a trading strategy that will help you prolong your trading career.
3. Is your decision being driven by your strategy or emotions?
Finally, ask yourself this. Are you just hoping that things will work out in your favour or is this a good strategy that you have come to after research and analysis.
If it is emotions that are guiding this move, you might want to reconsider. There is no room for emotional thinking in forex trading, not if you want to be successful.
We hope this will help new traders make more informed decisions about forex trading.