Trading Guide
  • 👋 Introduction
  • 📈 Technical Analysis
  • 📙 Vocabulary
  • ⚙️ INDICATORS
    • What Are Indicators
    • Types of Indicators
    • Awesome Oscillator
    • Relative Strength Index (RSI)
    • Moving Averages (SMA, EMA)
    • Moving Average Convergence Divergence (MACD)
    • Moving Average of Oscillator (OsMA)
    • Alligator Indicators
    • Renko Bars
    • Average of ATR
    • Force Index
    • Relative Vigor Index (RVI)
    • Money Flow Index (MFI)
    • Williams Percent Range (WPRange)
    • Zig Zag
    • Market Facilitation Index
    • Commodity Channel Index (CCI)
    • Traders Dynamic Index (TDI)
    • Gator Oscillator Indicator
    • DeMarker
    • Ichimoku Kinko Hyo Indicator
    • Stochastic Oscillator
    • Average Directional Index (ADX)
    • Bollinger Bands
    • Envelopes
    • Fractals
    • Heikin-Ashi / Heikin-Ashi Smoothed
    • Weighted Moving Average (WMA)
    • Linear Weighted Moving Average (LWMA)
    • Murrey Levels
    • Ozymandias Indicator
    • BullsPower / BearsPower
    • Parabolic SAR
    • Standard Deviation
    • Momentum
    • Vortex
    • Accelerator Decelerator Oscillator
  • 🔍 PATTERNS
    • What are Patterns
    • 3 Types of Patterns
    • Double Top / Double Bottom
    • Ascending Triangle / Descending Triangle
    • Symmetrical Triangle
    • Rising Wedge / Falling Wedge
    • Bullish Flag / Bearish Flag
    • Triple Top / Triple Bottom
    • Head and Shoulders
    • Pennant
    • Rectangle
    • Rounding Top / Rounding Bottom
    • Spikes Pattern
    • Island Reversal
    • Cup & Handle
    • Diamond
  • 🧠 STRATEGIES
    • What Are Trading Strategies
    • The Outside Bar trading method
    • Two Stochastics
    • Murray + Trend
    • Ranger
    • Ozy
    • EMA + RVI
    • SMA Tunnel
    • 4UJ
    • The Momentum Elder
    • Envelopes + MACD
    • Parabolic SAR + MACD
    • The Holy Grail
    • The Kumo Breakout
    • The Sidus Approach
    • The Stochastic + Trend Trading Method
    • CDMA
    • BullDozer
    • ZigZag + MA + ZigZag
    • Fractals + OsMA
    • The Puria Method
    • The MACD Profitunity
    • The Rachek’s Method
    • Bollinger Bands Scalp
    • TDI System
    • EMA + Stochastic
    • The Universal Kit
    • Double MACD
    • Sten
    • The Profitunity Trading Approach
    • Sardar
    • For Yen Crosses
    • Over 80
    • Nial Fuller’s Three Oscillators
    • Forex Smart
    • HeikenAshi + TDI
    • Two Groups of SMA
    • CSBB
    • 2×2
    • CAW
    • UMI
  • ⚖️ RISK MANAGEMENT
    • Intro
    • Position sizing
    • Stop-Loss Orders
    • Risk-Reward Ratio
    • Diversification
    • Hedging
    • Trading Psychology
    • 📝 Risk Management Calculator
  • 💡 TIPS
    • 25 Trading Tips
  • ⚠️ INFO
    • Disclaimer
    • Content Used
  • 🔗 LINKS
    • Useful Links
    • 🔒 Algorithmic Trading: How to automate your strategies with trading bots
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  1. ⚖️ RISK MANAGEMENT

Position sizing

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Last updated 4 months ago

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 or any other backtesting tool / trading simulator / demo account.

Steps:

  1. Calculate risk amount: 2% of $10,000 is $200.

  2. Set stop-loss. Assume your stop-loss is 50 pips away from your entry price.

  3. Determine position size. Use the formula: Position Size = Risk Amount / Stop-Loss. So, $200 / 50 pips = 4 lots.

  4. Enter the trade. Place a buy or sell order for 4 lots of EUR/USD with a stop-loss 50 pips away.

  5. Monitor. Keep track of the trade to see if your position sizing works as planned.

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