Proper position sizing is something many traders never even think of, let alone learn to master. Here is a very quick guide to position sizing.

To determine our positions size we must first set a stop level. This should be a logical place which will be out of range of normal market movements, and if hit will be at a level where we know we are wrong about the direction of the market. Remember a trader should not risk more than1-2% on a trade. Less is better. Larger accounts are likely to risk much less than 1% of capital on many trades.

Let’s say we choose a stop which is 50 pips below our entry buy price. If our account is $5000, we can have a maximum loss of $100 if we risk 2% of our capital on the trade. Therefore, we now know that we can take a maximum of 2 mini lots on this trade. If our stop is hit, we will lose 50 pips X 2mini-lots, or $100 on a mini account (each pip is worth $1 approximately in a mini account).

Let’s look at a different example with a larger account. Say a trader has a $1,000,000 trading account. 1% of this account is $10,000, but often a trader will not even come close to risking this much on an individual trade. Therefore the trader may choose a set dollar amount to risk. This trader may choose to risk up to $2000 on a particular trade. The method above can be used here as well. If our stop is 50 pips, and our maximum loss is $2000, the trader can take 40 mini lots, or 4 standard lots. This will ensure that is position is optimized for the risk level.

Whether we risk a percentage of our account on each trade, or choose a fixed dollar amount we are willing to risk on a trade (for larger accounts) the method above should be employed to determine the proper position size based on the stop level which is ideal for the trade.

Best Wishes in Your Trading,

Cory Mitchell, CMT
Chief Market Strategist

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