Choosing the right position size for each trade is crucial to success in forex trading. Particularly in forex day trading, a trader’s position size or trade size is thought to be more significant than their entry or exit point. Even with the strongest trading method, you run the danger of losing money if your trade sizes are off. It is quite safe to find the right position size to keep you within your risk comfort zone.
Your position size in forex trading refers to how many lots (mini, micro, or standard) you take on a trade.
The danger can be split into two categories:
- trade risk
- account risk
Determining your Position Size
No matter the state of the market, follow these methods to obtain the optimum position size:
Step 1: Fix your account risk limit per trade
The percentage of your account that you are willing to risk on each trade should be set aside. Many big traders and experts decide to stake 1% or less of their overall account on each deal. This is in accordance with their capacity for risk (in this case, they can tolerate a 1% loss and the remaining 99% will still be there).
The ideal level of risk is one percent or less, but if your risk tolerance is larger and you have a solid track record, two percent is still feasible. It is not advised to go higher than 2%.
Risk no more than 1000 INR (1% of the account), for instance, on a trading account with 1,000,000 INR. This is the risk associated with your trade, which is managed with a stop loss.
Step 2: Determine pip risk on each trade
The following stage for this particular trade is to set a stop loss when your trading risk has been determined. It is the number of pip differences there are between your entry price and your stop loss order. You are exposed to this many pip risk. Each trade is unique and depends on volatility or approach.
We occasionally place a 5 pip risk on our transaction and occasionally a 15 pip risk. Assume you have a 1,000,000 INR account with a 1,000 INR (1% of account) risk limit per trade. Your stop loss is set at 66.2500 and you buy USD/INR at 66.5000. This trade carries a 50 pip risk.
Step 3: Determining your forex position size
Use this formula to calculate the size of your optimal position:
Pips at Risk * Pip Value * Lots traded = INR at Risk
The FX market allows for the trading of various lot sizes. Each movement of a pip costs $0.1 for a 1000 lot (known as micro), $1 for a 10,000 lot (known as mini), and $10 for a 100,000 lot (known as standard). All pairs in which the USD is the second listed currency (base currency) must adhere to this.
Consider that your trade risk is 1% ($100 each trade) and that you have a $10,000 account.
- Ideal position size = [$100 / (61 * $1)] = 1.6 mini lots or 16 micro lots
Making a forex trading spreadsheet to monitor your progress
The creation and upkeep of a forex trading spreadsheet or notebook is regarded as a best practice that benefits both professional and novice traders.
Why do we need it?
To monitor our trading progress over time, we require a trading spreadsheet. In order to understand how you are performing over a few trades, it is crucial to have a mechanism to track your performance. This enables us to avoid being fixated on any specific trade. A trading spreadsheet can serve as a continual and practical reminder that our trading performance is evaluated over a number of deals, not just one specific forex transaction.
With the use of a spreadsheet, we not only keep track of our transactions but also track daily patterns with various currency pairs without the use of additional layers of technical indicators.
Take a look at this illustration of a forex trading spreadsheet:
Keeping track of your forex trading activities is important and can help you develop into a competent trader.
Foreign Exchange Risks
Each nation has its own currency, such as India has the rupee and the United States has the dollar. The exchange rate is the cost of one currency in relation to another.
Over time (quarterly, halfyearly, etc.), due to variations in exchange rates, a company’s assets and liabilities or cash flow that are denominated in foreign currency like the USD (US dollar) change in value as measured in domestic currency like the INR (Indian rupees). Exchange rate risk refers to this variation in the value of assets, obligations, or cash flows.
Therefore, foreign exchange risk (also known as “currency risk,” “FX risk,” or “exchange risk”) is a financial risk that arises when a corporation conducts financial transactions in a currency other than its base currency.
Exchange risk is the term used to describe this uncertainty over the rate that would apply at a future time.
