How to grow your trading account: How to calculate position size

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Forex has to do a lot with knowing what to risk, knowing how much of a position you should open, and a lot of number work. In this post, I will be talking about how to calculate the size of your position with respect to how much you have (capital).

Position sizing is that section of your trading that tells you how much contracts you should buy before executing the trade of your choice. This is really important if you don't want your account to get blown fast, or if you don't want your account to grow at a slow rate.

Position sizing has to do with risk management. If you are going to be a successful trader, one of the things you must take into cognizance is position sizing which is a section of risk management.

You want to know how much contracts you need to buy that is with respect to how much you have accepted to lose.

Calculating Position size

Step 1
Check your net liquidation: This refers to the amount of money in your account. It is synonymous with your capital.
Step 2
Determine your risk per trade:
Investopedia defines risk as to the chance that an outcome or investment’s actual profit will differ from an expected outcome or return. Risk refers to the maximum amount of money you are willing to lose for every trade you open. Most schools of thought believe 1-3% of your capital is ideal. Well, I feel there is no fixed range. It should be dependent on what can make you rational when you have a trade on the market. Whatever you do, make sure you are consistent with your risk per trade. There should be an interval that should be determined by you before altering the amount of capital. It could be daily, weekly, or monthly.
Step 3
Determine your stop loss distance: Your stop loss is set based on your strategy. a stop loss is the preset amount of your capital, you are willing to lose.
Step 4
Determine the size for each trade;
Most forex traders don't manually calculate their position size. However, for the purpose of education, I will be putting the formula here. I will be dropping a link that will help you calculate position size without racking your brain at the end of the post.
.

Position size = ^{(Net liquidation x %risk per trade)}/_{stop loss distance x $value per pip}

where
net liquidation is your capital
stop-loss distance refers to the distance in pips between the entry and the point you are willing to leave the trade with a loss.
$value per pip refers to the value of a pip for a standard contract which is most times 10 dollars.

For Example

Supposing you have a trading account worth ten thousand dollars and you see a EUR/USD trade set up which allows you to place your stop loss 50 pips away from your entry point with a risk of 2% per trade. Your position size will be?

Position size=

^{(10000 x 2%)}/_{(50 x10)}
=^{(10000 x 0.02)}/₅₀₀
=¹⁰⁰/₅₀₀
=0.2 lots
This implies that for this trade you need to trade 2 mini lots to trade according to the your plan.

Importance of Position size calculation

Position size calculation plays an important role in trading as this helps with keeping your risk in check. This helps also in keeping your equity in check. With position sizing, your equity will move gradually if you have a good trading plan.

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Instead of racking your brain solving all this mathematics, you can just click [here](https://www.myfxbook.com/forex-calculators/position-size) and insert the figures and have it all calculated for you.

On a final note;

It is not about how much you make in one trade, it is about how much you can make and consistently keep over time.

References

1. babypips
2. Adam Khoo

Thank you for reading my blog