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Position Sizing Techniques in Forex

Part of creating a Forex trading plan to become a profitable trader is deciding on a position sizing technique. The size of the positions you trade is part of your money management plan. Money management is as important as your basic trading strategy. Not only does your position sizing technique impact the results of your trades, but the amount of money you choose to invest could determine whether you succeed as an FX trader or blow your account.

The first thing you will need to decide is what percentage of your trading account to risk on a given trade. Some traders risk more if they are more confident of a trade, while others risk the same amount for any trade. Since it is a good thing only to take “A trades” anyway, you probably will end up risking the same initial amount on every trade if you only take trades you are truly confident in to begin with. Different approaches do work for different people, though. How much is the right amount to risk on a Forex trade? While many people trade on leverage in order to experience the huge gains, which leverage can result in, leverage can destroy your account within just a couple of trades, too. With that in mind, the majority of profitable traders only risk a small percentage of their account on any trade. 2.5–5% is a reasonable amount. If you are risking more than 10%, you should probably rethink your position size. Forex trading is appropriate for patient traders who are willing to take their time increasing their bankroll. If you lack this patience, you also lack discipline. It takes much longer to blow an account when you risk only 2.5% per trade than if you risk 50%! You can use a position size calculator to simplify all this.

What about when you are actually in a winning trade? Should you increase your position size (scale up) or should you keep it the way it is? This is very much a matter of personal preference and should depend on your system and your trading style. This is definitely something you will want to test thoroughly with historical and current data before you decide on a technique to use live. Some traders will gradually add more to a trade as it moves in their favor and they become increasingly confident that they are in a trending situation. Others will not modify their position size at all, but may for example choose to trail their stop in order to collect more profits. In a non-trending foreign exchange market you probably do not want to scale up, since during consolidation reversals are very common.

Position sizing in Forex is one of the most important issues you will need to consider. Even the best, most accurate trading method will fail if you do not manage your money in a responsible way. Scaling up in Forex is a great way to get more out of a trade, but only if the context supports the decision. Since scaling up is a very discretionary choice, it may also not be suitable for more mechanical traders. The only way to make the right decision is to try different position sizing techniques out for yourself and find out what feels best for you.