Let’s imagine you found a great chart opportunity to trade a currency pair. Now, how do you know exactly how many contracts to buy or sell?
You do it through position sizing.
In this article, you’ll learn how to calculate the Forex position size, ie. the size of your trade so that you always keep your risk low and protect your account from being wiped out.
What is Forex Position Sizing?
This is a vital part of your trading system that helps you keep your risk per trade as small as possible.
With this, even if you’re on a losing streak, you can continue trading to reap the positive edge that comes with a large sample of trades.
Position sizing helps you determine:
- How many contracts should you long or short for any particular trade?
- What is your risk per trade and the overall risk of your portfolio?
- What returns can you expect for your portfolio?
How to Calculate Forex Position Size
Step 1: Check Your Net Liquidation (i.e. Capital )
Once you log in to your broker platform, you can look at your net liquidation, which is the amount of capital that you have for trading.
For example, if you open an account and you fund it with $1,000, that is your net liquidation.
Step 2: Determine Your Risk Per Trade
Risk refers to the maximum loss you’re willing to take for every trade you put in. This is the maximum you can lose if your stop-loss is hit.
⚠️ Remember this: NEVER risk more than 1% to a maximum of 3% of your capital in any single trade.
If you’re new to trading Forex, my suggestion is to always start with a 1% risk per trade. When you’re confident and experienced enough, you can raise it to 2% and eventually to 3% maximum.
Once you decide on your risk per trade, you must stick with it consistently over a period before you raise it.
Always be consistent with your risk per trade because you can never predict the outcome of any single trade.
Remember: On a trade-by-trade basis, every trade outcome is random.
Step 3: Determine Your Forex Position Size for Each Trade
To help you understand how position sizing works, I’ll show you how to calculate it manually.
Here’s the formula:
[(Net Liquidation) x (% Risk Per Trade)] / [(Stop-Loss Distance) x ($ Value Per Pip)]
Now, what do all these things mean? Let’s look at some examples.
Forex Position Sizing Example #1
- Net Liquidation: Let’s say you start with $10,000 in your account. Net liquidation will be $10,000.
- % Risk Per Trade: Imagine you’ve just started trading, so you risk 1% per trade.
- Net Liquidation x % Risk Per Trade: $10,000 multiplied by 1% is $100. This means the maximum you are willing to lose is $100 per trade.
- Stop-Loss Distance: This is the distance from your entry price to your stop-loss price. Say, you buy at 1.2120 and you place the stop-loss at 1.2100.
Now, your stop-loss placement is always based on candlestick patterns. So for different trades, your stop-loss will be placed at different distances. (In my Forex trading course, I teach you exactly where to place your stop-loss.)
Depending on the price action, your stop-loss may be 8 pips or 20 pips away. In this case, let’s imagine you’re placing your stop-loss 20 pips away.
- $ Value Per Pip: This figure depends on the currency pair you’re trading. If you’re trading EUR/USD, this will be $10. Other pairs could be slightly more or less than $10. There are many websites where you can check this value.
This brings us to the equation: ($10,000 x 1%) / (20 x $10) = 0.5 Lot
In Forex trading, one standard lot is 100,000 of the base currency. In this example, we’re trading the EUR/USD, so the base currency is in euro.
One lot is 100,000 euro, so 0.5 lot is 50,000 euro, which is the exact amount you should buy to place this trade.
Forex Position Sizing Example #2
- Net Liquidation: Let’s say you funded your account with $10,000.
- % Risk Per Trade: Let’s imagine you’re more experienced now, and you decide to risk 3% of your capital.
- Net Liquidation x % Risk Per Trade: $10,000 multiplied by 3% is $300. This is the maximum amount you’re willing to lose in a trade.
- Stop-Loss Distance: This time, your stop-loss is 30 pips away.
- $ Value Per Pip: Say you’re trading EUR/USD again, so the $ value per pip is $10.
The number of lots you should trade = ($10,000 x 3%) / (30 x $10) = 1 Lot
Recall that one lot is 100,000 of the base currency, which is euro in this case. So you will buy 100,000 euro.
Important Notes about Forex Position Sizing
- No Matter Where You Place Your Stop-Loss, Always Be Consistent with Your Risk Per Trade
Remember this: Regardless of where you place your stop-loss, whether it’s 10 pips away or 100 pips away, your risk should always remain the same.
You can’t say things like, “This is going to be a winner, I’m going to risk 3%.” “I’m not too confident with this other trade, so I’ll risk 1%.” No, it doesn’t work this way.
Once you decide on your risk per trade, such as 1%, you must risk 1% for every trade.
- Always Determine Your Stop-Loss Before Calculating the Number of Lots to Trade
Depending on the strategy and the specific candlestick pattern of the trade, you place your stop-loss at different distances (usually below the previous low of the candle).
So you must always determine your stop-loss first, then calculate the number of lots to trade to keep your risk consistent.
- The Number of Lots to Trade Is Inversely Proportionate to Your Stop-Loss
The farther your stop-loss, the smaller the number of lots that you trade. The nearer the stop-loss, the greater the number of lots that you trade, with your risk staying constant.
Using a Forex Position Size Calculator
Alright, now that you know the concept behind position sizing, let’s look at the shortcut. Just do a Google search for “Forex position sizing calculator” or download an app on your phone.
All you need to do is key in the values accordingly. Choose the currency pair you’re trading and it’ll determine the $ value per pip for you. Simple as that!
Position sizing is just one of the many things you must learn to trade Forex profitably.
In my free trading lessons, I’ll teach you even more risk management and trading psychology techniques to protect and grow your money.