Forex risk management: How to get position sizing right
There are two major benefits of risk management when you trade forex.
Firstly, risk management protects you from losing a large amount of money in one trade.
And secondly, risk management will make you more profitable in the long run.
One key aspect of risk management is position sizing. So how can you make this work for you?
Read on to find out…
Using position sizing as part of your risk management strategy
As part of your risk management
strategy, position sizing is about controlling the amount of money you put into each trade.
Let’s say you have R20,000 in your forex trading account. If you decide to put 25% of this into each trade you enter, you’d only need a few losses and not much left in your account.
This is why it’s vital to control the amount you risk on each trade. Start off by risking a small amount of your trading pot and build it up over time.
It’s a good idea never to risk more than 3% of your trading pot on any one trade. You can decide what’s right for you, anywhere between 1% and 3%.
For instance, when you first start trading, you may want to only risk 1% of your trading pot. As your trading confidence grows, you can increase this to 2% or 3%.
The more successful you are, the more you’ll put into trades.
How position sizing works when you trade forex
If you start off with a pot of R20,000 and decide to risk 2% per trade, this means you’ll never lose more than 2% of your trading pot. In other words R400 (2% of R20,000).
After a run of winning trades, your trading pot grows to R30,000. Sticking to risking 2% of your capital, you’ll now risk R600.
That’s the great thing about position sizing. As long as your winners outweigh your losers, your trading pot will grow.
And by risking small amounts on each trade, you’ll find it easier to keep a lid on your emotions.
So there you have it. How to get position sizing right.
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