Position Sizing in FOREX Trading

Position Sizing in FOREX Trading

Submitted by adil on Thu, 07/10/2014 - 08:52

How Much Risk Should You Take?

Every FOREX trader wants to know how much risk he should take and how position sizing can help him sustain a profitable trading business for a long time. Let us first burst some misconceptions about FOREX trading before moving onto the benefits of position sizing and risk management.

Does diversification improves profit making chances in FOREX trading?

Many investors and online tutorial resources emphasis on a diversified investment portfolio. Many wrongly quote Warren Buffet famous words about putting your eggs in different baskets. At this juncture you should ask yourself “Am I doing FOREX trading to become wealthy or just to survive”.

Instead of diversification, it is a better practice to stick to few baskets to increase your chances of making real progress. That will enable you to become focused in making more money by dealing with increased stakes in the fields you know abundantly to make a wise decision. Keep in mind that diversification is not the path to riches, it is a way of balancing your winnings with the losses to end up with average profits.

Is FOREX a high stake trading venture?

The ability to leverage your position and a 24/7 available trading system ensures continuous liquidity so you can make big trades without any second thought. With leverage, you can use very small personal investment to control very large stakes in a FOREX market where 100:1 leverage is a common figure. The inherent market liquidity enables the traders to enter and exit whenever they want. Using more large leverage positions can be profitable if you keep in mind following important points:

• Make sure you know exactly how much risk there is in the trade you are going to commit.
• Set stops at strategic points so you can leave the market quickly so you will be able to trade again comfortably.
• Using high amount of leverage is the opportunity to make big profits but it also means higher degree of risks.

How position sizing should be used to control the risks?

A trader should perform risk management in FOREX trading by considering the following factors:

• The trader should have a good idea how much risk he can afford. The risk is not a confirmed loss, but the trader should be able to sustain his business even if he loses everything he risked.
• When embarking on a trading spree in FOREX, the trader must assess the situation of his investment capital and the extent of leverage that he intends to deploy.
• Depending on his investment account, the trade should commit to trades with an average risk of 2-3%. If the trader has enough experience and resources, he can commit to trades with 5% risks. In no case, the trader should risk more than 10% of his money in a single trade.

The above factors are related to the concepts of position sizing. Managing your risks makes FOREX trading a well-thought speculation rather than wild betting. If you want more risk to reward ratio, you can increase the risks but only in the case when you have high degree of confidence in the system’s reliability and market stability.