Trading Education

Position Size in Trading: What Should be Borne in Mind?

If you have decided to open a position for the first time, as a novice trader, you must answer the following:

  • What instrument to choose?
  • Open a long or short position? 
  • How much money to invest in this particular asset?

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If traders usually find an answer to the first two questions by the time they start trading, then there can be some difficulties with the third one. In this article, we will solve the calculation position size issue, and show a close relationship between position sizing and risk management.



When people hear about large losses incurred while trading on the exchange, one should know that they are always associated with the wrong position size. Typically, traders open a too-large position and take too much risk in trading, which results in catastrophic losses.

Preparation

Position size is the selection of the correct volume to open a buy/sell order. This skill is the most important in trading, especially in the cryptocurrency market, so one should absorb as much information as possible to make it easier in action.

Traders are people capable of risk management, so before you start trading with real money, you must be convinced that you can calculate the correct position size. Determining the size of a position that would satisfy your risk level is quite easy: you just need to know the answers to a few questions, that will help to make certain decisions about choosing a position size. Before proceeding with the aspect, please determine these factors:
  • The size of your deposit;
  • Currency pair;
  • Percentage of your capital to be at risk;
  • Preferred stop loss level;
  • The current quotes of your currency pair.

This set of elements is part of the concept of strategic trading and must be carefully considered before the actual transaction is made with any amount of trading capital.

Position size calculation

One of the simplest and most effective position size models is the fixed fraction model. With this strategy, you risk a particular X% of your trading account on any single trade. For example, you can use 1-2% risk per trade. For the cryptocurrency market, traders more likely to choose 1%. More specifically, the choice of the position size - depends on your trading style and attitude to risk.

Next, one needs to decide on the placement of the stop-loss order. Then you have to outline the most recent price fluctuations, support & resistance levels, and take into account other factors of the technical analysis.

Ones these first steps are made, the calculation of the position size will be the following:

Position size = (Current account size) x (Risk per trade) / (Distance between entry and stop) x (Pip value)


Here is the formula for calculating the pip value:

1 pip / current exchange rate = pip value


Let's say we have a $10,000 account. We decided not to risk more than 1% per trade. This means that we cannot lose more than $100 in a single trade. The distance between the entry and stop is 80 points. The pip value is $10. 

The calculation is as follows:

$ 10,000 x 0.01 / 80 x 10 = 0.125 lot


So in this example, based on our $ 10,000 account with 1% risk and placing a stop at our location, we would be allowed to accept a maximum position size of 0.125 lot. To properly exercise this model, you also need to take into account the fees you are paying for transactions.

Closing line

The first and foremost consideration for position size and trading, in general, is to keep your trading account in operating condition, and this can only be done through proper risk management. In the course of trading, in case you develop a successful trading strategy, you will be able to change the profitability of your trade by changing the accepted risk, or by changing the size of the open position. This process can be either static - once determined in the course of trading, or dynamic in the process of your development as a trader. There is a free field for your imaginations and experiments.

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