Position sizing
Position sizing is all about deciding how much to trade on each position. It’s crucial to not put too much on the line in any single trade. A common rule is to risk only 1-2% of your trading account on one trade. This way, even if things go south, you’re not wiped out.
Exercise
Objective: learn how to calculate the right position size to manage risk effectively.
Scenario: you have a $10,000 trading account. You want to enter a trade on EUR/USD, risking 2% of your account.
All exercises are performed on TradingView or any other backtesting tool / trading simulator / demo account.
Steps:
Calculate risk amount: 2% of $10,000 is $200.
Set stop-loss. Assume your stop-loss is 50 pips away from your entry price.
Determine position size. Use the formula: Position Size = Risk Amount / Stop-Loss. So, $200 / 50 pips = 4 lots.
Enter the trade. Place a buy or sell order for 4 lots of EUR/USD with a stop-loss 50 pips away.
Monitor. Keep track of the trade to see if your position sizing works as planned.
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