Forex Trading: Calculating the size of the optimum position
Once we open the account with the broker that we have chosen, we know well the platform from which we operate and we are clear about how we will come and go in the various operations that take in the market, we have to master an absolutely fundamental aspect at the time of trading: calculate the size of the position with which we will enter each of the operations. That is: how much money will risk on each of the operations?
Though many people gives much more importance when the input and output operation, the truth is that trading is much more critical and ultimately decisive always working with optimal size to our own position and our objectives. At the end of the day, so one should always try to maximize profits but also minimize losses, so you cannot enter the market with oversized positions trying to win much, because we are risking our capital.
How the risk of an operation is calculated?
Assuming enter a market always protected by a stop loss order, the risk of an operation is determined by the distance to place the same from our point of entry and the size of our position. Farther stop loss and increased size of the position, we are incurring higher risk.
That is, if we put a stop loss at 20 pips from the entrance and operate with 1 lot, we have an equivalent operating with 2 batches risk but put the stop loss to 10 pips. If we are able to work with tighter stop loss, position sizes may be higher with identical risk assumed.
In the above example, assuming that the pip value is 10 $, we would be incurring both a currency risk 200 $. That is the maximum amount (commissions and spreads outside) we can lose in this operation.
What can take maximum risk in an operation?
But normally the calculation is reversed. That is, we are not starting from a stop loss and a size of position but our known values are first the maximum risk that we are willing to take and stop loss that interests us to put in an operation for which technically is consistent (not we will place a stop loss just above an important support if we long, for example).
It is widespread figure of 2-3% of total capital as the maximum risk which should be undertaken in each of our operations , considering conservative strategy with risks below 2% and aggressive above 3%. At the end of the day, that percentage protects us from leaving the account to zero with just a few bad operations followed.
Using the previous example, if I have an account $ 1000 should not risk more than 20-30 $ for each operation. As you can easily see, that means we directly have to work ideally with mini accounts (about $ 1 heat each pip, so to speak), because if we tried to operate standard accounts ($ 10 value PIP) have to work with 2-3 pips stop loss, unheard of.
How do I calculate the optimal position size?
Once we have all the values that we have been discussing in this article, the calculation of the optimal position size is almost instantaneous. When the truth, there are many free to easily obtain calculators optimal position size, but elemental understand why that optimal batch size.
The calculation itself is very simple. Always we start from three values: maximum risk of the operation (previously calculated), the distance from the stop loss and the pip value depending on the account that we are operating (standard, mini or micro). Then it’s as simple as translating the pips of stop loss in dollar (or the currency with which we have the account) by multiplying the distance of the stop loss in pips pip value and then divide the maximum risk between that figure dollar amount we have gained risky.
Continuing with the same example in this article: my maximum risk per trade is 30 $, I want to enter into a transaction in which I put the stop loss to 15 pips of my post, and I’m running a couple in a mini account with value $ 1 pip. The currency risk of the transaction is $ 15 per mini lot (15 pips x 1 $ / pip), and as my maximum risk is 30 $, I can operate with 2 minilots (30 $ / 15 $).