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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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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