How to Determine the Proper Position Size in Trading

Proper position sizing is something many traders never even think of, let alone learn to master. Here is a very quick guide to position sizing.

To determine our positions size we must first set a stop level. This should be a logical place which will be out of range of normal market movements, and if hit will be at a level where we know we are wrong about the direction of the market. Remember a trader should not risk more than 1-3% on a trade. Less is better. Larger accounts are likely to risk much less than 1% of capital on many trades.

Let's say we choose a stop which is 50 pips below our entry buy price. If our account is $5000, we can have a maximum loss of $100 if we risk 2% of our capital on the trade. Therefore, we now know that we can take a maximum of 2 mini lots on this trade. If our stop is hit, we will lose 50 pips X 2mini-lots, or $100 on a mini account (each pip is worth $1 approximately in a mini account).

Let's look at a different example with a larger account. Say a trader has a $1,000,000 trading account. 1% of this account is $10,000, but often a trader will not even come close to risking this much on an individual trade. Therefore the trader may choose a set dollar amount to risk. This trader may choose to risk up to $2000 on a particular trade. The method above can be used here as well. If our stop is 50 pips, and our maximum loss is $2000, the trader can take 40 mini lots, or 4 standard lots. This will ensure that is position is optimized for the risk level.

Whether we risk a percentage of our account on each trade, or choose a fixed dollar amount we are willing to risk on a trade (for larger accounts) the method above should be employed to determine the proper position size based on the stop level which is ideal for the trade.