What is “Position Sizing” and Why Is It Important?

Proper position sizing means setting the correct amount of units to buy or sell an asset. In other words, it involves finding the position size that will keep you within your risk comfort level.

 WHY IS IT SO IMPORTANT?                                              

Proper position sizing is a key element in risk management. And as we’ve been told many times, risk management can determine whether you live to trade another day or not.

It can keep you from risking too much on a forex setup and blowing up your account.

Sure, when you bet big, you can win big. But what happens when you lose? You don’t need to be a brain surgeon to figure that one out – you lose big, too.

Without knowing how to size your positions properly, you may end up taking trades that are far too large for you. In such cases, you become highly vulnerable when the market moves even just a few pips against you.

How do we prevent ourselves from risking too much?

Identify and acknowledge

Nobody does something just for the heck of it. Binge eaters don’t just overeat just so they could eat a lot. One way or another, they get something out of it. Some sort of self-fulfillment perhaps.

The same is true for a forex trader who always finds himself betting too much on his trades even when past experience tells him it’s not a good idea. Why does he keep on doing it?
A little introspection can make one realize that it’s more than just about being greedy.
For most traders, they realize that their aggressive behavior is tied to their self-worth. They bet big in hopes that they win big. The prospect of massive gains consequently makes them feel good about themselves.

The problem, though, is that they don’t fully understand how much they could lose and they find themselves being unable to control their emotions when price goes against their way, even by just a few pips.

In order to address it, one has to acknowledge that there is indeed a problem and that will make a trader realize that this mindset is flawed. With time and conscious effort, he will eventually realize that his trading positions don’t measure his worth as a trader.

KNOW YOUR LIMITS ‼️

You also need to find out your tolerance for risk. There are two opposite sides in the trading spectrum with one extreme being risk-seeking and the other being risk averse.

Do you know where you stand?

Although most forex traders risk a fixed percentage of their account on a trade, there’s no one-size-fits-all method to go about it.

Before you get all mathematical, you first need to determine your psychological limits for risk. If you’re unsure how to go about it, take it slow.

Adjust your position sizes according to the potential losses that you know you can sustain.
Keep them small enough so that even when you lose, they don’t evoke any strong emotional response that could derail your trading.

Forex traders often make the mistake of focusing solely on finding the perfect entries and exit. But what really spells the difference between successful and unsuccessful traders is risk management. It’s something that should never be taken it for granted. And the first step towards smart risk management is proper position sizing.

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4 Steps to Entering Forex Trade Orders Like a Boss

 

A single mistake could spell the difference between winning and losing a trade.

This is why it’s important that you develop the habit of thoroughly planning your orders.

Here are four steps you can follow to build good ordering habits:

1. Identify your entry, stop loss, and profit levels

I won’t go into the “whys” of a trade since everyone has their own methods for determining directional bias, time, and volatility expectations. After you’ve made your fundamental and technical analysis, you’ll be ready to mark your entry and exit levels. Your entry and profit levels don’t have to be set in stone as you adjust to what the market is giving to you, but you have to be firm on your stops; you can use a chart stop, time stop, or volatility stop to determine trade invalidation points. Once you have your entry and exit levels, you can check your reward to risk ratio to see if the trade is worth taking on.

2. Use proper position sizing

Proper position sizing is THE single most important skill that traders could have. Without it, you’ll end up taking trades that are too big or too small, either blowing out your account or under-utilizing a high performing trading method.

Typically, risking a max of 1% of your account per trade is recommended for new traders to avoid ruin, but that will change as your skills grow.

Using a position size calculator, you can match your ideal risk per trade together with your entry and exit levels to give you the exact number of units that you should work with.

Of course, you could always round them off (as long as you stay within your max risk) to make your trade journaling easier or if your broker isn’t flexible with their position size offerings.

3. Determine the type of order you need

The term “order” refers to how you will enter or exit a trade. Be sure that you know which types of orders your broker offers. As traders get more experienced, more sophisticated trade management tools such as good ‘till canceled (GTC), good for the day (GFD), one-cancels-the-other (OCO), and one-triggers-the-other (OTO) should be thrown into the mix (if a broker offers them) to better manage a position while you’re away from the computer. Make sure you read up and practice using them A LOT before going live with them.

4. Monitor your trade

Your involvement in your trade doesn’t stop with placing orders. Whether you’re a day, swing, or position trader, you have to keep close tabs on price action and market drivers to see if your initial trade idea has been invalidated. Check the economic calendar often read market news updates to see if the fundamental story or market sentiment is changing.

With time and experience you’ll learn to identify which reports are just noise and which ones require trade adjustments.

What’s important is that you find a balance between being flexible to the changing market conditions and sticking to your original trading plan.

Remember that perfection in performance isn’t a perfect win percentage–it’s about doing all the right things, the right way, at the right time and avoiding as many mistakes as possible.
So try to make a habit of accurately placing your trade orders and double-checking them every time. The forex market is unpredictable enough; don’t make it harder on yourself to be successful with execution mistakes!

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How To Set A Stop Loss Based On Price Volatility?

To put it in simple terms, volatility is the amount a market can potentially move over a given time.

Knowing how much a currency pair tends to move can help you set the correct stop loss levels and avoid being prematurely taken out of a trade on random fluctuations of price.

For instance, if you are in a swing trade and you know that EUR/USD has moved around 100 pips a day over the past month, setting your stop to 20 pips will probably get you stopped out too early on a small intraday move against you.

Knowing the average volatility helps you set your stops to give your trade a little breathing room and a chance to be right.

Method #1: Bollinger Bands

One way to measure volatility is by using Bollinger bands.

You can use Bollinger Bands to give you an idea of how volatile the market is right now.

This can be particularly useful if you are doing some trading range.

Simply set your stop beyond the bands.

If price hits this point, it means volatility is picking up and a breakout could be in play.

Method #2: Average True Range (ATR)

Another way to find the average volatility is by using the Average True Range (ATR) indicator.

This is a common indicator that can be found on most charting platforms, and it’s really easy to use.

All the ATR requires is that you input the “period” or amount of bars, candlesticks, or time it looks back to calculate the average range.

For example, if you are looking at a daily chart, and you input “20” into the settings, then the ATR indicator will magically calculate the average range for the pair over the past 20 days.

Or if you are looking at an hourly chart and you input 50 into the settings, then the ATR indicator will show you the average movement of the last 50 hours.

This process can be applied by itself as a stop or in conjunction with other stop loss techniques.

The point is to give your trade enough breathing room for fluctuations here and there before it heads your way…and hopefully, it does.

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Without Risk Management, Forex is GAMBLING!!!

 

There’s a term for this type of investing….it’s called…GAMBLING!!

When you trade without risk management rules, you are in fact gambling.

You are not looking at the long-term return on your investment. Instead, you are only looking for that “jackpot.”

Risk management rules will not only protect you, but they can make you very profitable in the long run.

If you don’t believe us, and you think that “gambling” is the way to get rich, then consider this example:

People go to Las Vegas all the time to gamble their money in hopes of winning a big jackpot, and in fact, many people do win.

So how in the world are casinos still making money if many individuals are winning jackpots?

The answer is that while even though people win jackpots, in the long run, casinos are still profitable because they rake in more money from the people that don’t win.
That is where the term “the house always wins” comes from.

The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money–not the gamblers.

Even if Joe Schmoe wins a $100,000 jackpot in a slot machine, the casinos know that there will be hundreds of other gamblers who WON’T win that jackpot and the money will go right back in their pockets.
This is a classic example of how statisticians make money over gamblers.

Even though both lose money, the statistician, or casino in this case, knows how to control its losses.
Essentially, this is how risk management works. If you learn how to control your losses, you will have a chance at being profitable.

In the end, forex trading is a numbers game, meaning you have to tilt every little factor in your favor as much as you can.

In casinos, the house edge is sometimes only 5% above that of the player. But that 5% is the difference between being a winner and being a loser.

You want to be the rich statistician and NOT the gambler because, in the long run, you want to “always be the winner.”

So how do you become this rich statistician instead of a loser?  Join me Below!

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