Forex Position Management
Forex Position Management #1 - The Importance of Proper Position Sizing Now that weve learned that trading too much can be costly, lets learn how to use leverage with proper position sizing Determining position sizing means setting the right forextradingforextradingaccountsregisterstype pair to buy and sell in units Thforex trading accounts is one of the most important skills in a traders skill set In fact, well take it a step further and call it an important skill Traders are first and foremost risk managers, so you should be able to calculate the basic position cashback forex in your sleep before trading with actual money…… or at least try to trade the non-farm payrolls report when you wake up, still sleepy-eyed! Finding the right position size will make it easier to put you at the right risk…… we use the word easier here casually depending on the currency pair you are trading and the currency of your account (is your account USD, EUR, GBP, etc??) The calculations need to include one or two steps before we start calculating, we need five points of information: 1. account equity or balance 2. the currency pair you are trading 3. the rate you are willing to risk 4. stop loss set points 5. conversion currency pair exchange rate is simple enough, right? Lets look at a few examples Forex Position Management #2 - How to Calculate Position Size To keep things simple and easy to understand, as always, we will give examples of everything This is a novice Zhang San a long time ago, he was a more youthful novice than he is now Because he used a huge position size, he lost his entire account He was like a cowboy from the Midwest who didnt have the brains to trade, but also massive trading Zhang San Did not fully understand the importance of position size and his account paid a heavy price for it Now he is back on the course and making sure he fully understands the content Dont let what happened to him happen to you again! In the following example, we will show you how to calculate the size of your position based on your account size and the appropriate level of risk Your position size also depends on whether your account is in the base currency or the quote currency Account currency is the relative currency Newbie Zhang San deposited $5,000 into his trading account and he is ready to start trading again Suppose he is using the swing trading system used to trade EUR/USD Since losing his first account, he vows not to risk more than 1% of his account per trade. Lets calculate what his position size should be in his risk-appropriate zone. USD Next, we divide the amount at risk by the stop loss to arrive at a value per pip of $50/200 pips = $0.25/pips Finally, multiply the value per pip by the known unit/pip value ratio of EUR/USD In this example, 10,000 units (or one mini lot), the value per pip change is $1 $0.25/pips * [(10,000 units EUR/USD)/($1/pips)] = 2500 Unit EUR/USD So, newbie Zhang San should trade 2500 units of EUR/USD or less in order to be at the right risk level with the existing account settings is simple huh? But what if your account is in the base currency? Lets assume that Zhang San is staying in the Eurozone and decides to trade Forex through a local broker with a total account size of €5,000 using the previous example (trading EUR/USD with a stop loss set at 200 pips). Now we have to convert it to dollars, because currency pairs are denominated in relative currencies assuming the existing exchange rate of 1 euro to 1.5000 dollars (euro / dollar = 1.5000) we have arrived at the value of the conversion to dollars, we have to convert the existing exchange rate of euro / dollar, and then multiply the total amount of euros we are willing to risk (1.5000 dollars / 1.0000 euros) * 50 euros = about 75 USD Next, divide the risk in USD by the stop loss points ($75)/( 200 points) = $0.375/point This gives the value per point with the stop loss set at 200 points, within the appropriate risk ratio for Zhang San Finally, multiply the value per point by the known unit/point value ratio: ($0.375/point)*[ (10,000 units of EUR/USD)/ ($1/pip)] = 3750 units EUR/USD So, taking a risk of 50 euros or less and setting a stop loss of 200 pips to trade EUR/USD, Zhang Sans position size cant exceed 3750 units still pretty simple, huh? Now it gets a little more complicated dont worry well explain everything and make it as easy as baking a cake Forex Position Management No. 3 - Compound Position Size In this lesson, well teach you how position size is calculated when the account currency is not the currency of the currency pair you want to trade in The account currency is not any one of the currency pairs traded, but the relative currency of the converted currency Zhang San returned to Today, he decides to trade EUR/GBP with a stop loss set at 200 pips. To find the correct position size, we need to determine how much Zhang San is willing to risk (in GBP). Selling EUR/GBP he is only willing to risk 1% of his $5000 account, i.e. $50 To find the correct position size for this scenario we need to know the GBP/USD exchange rate assuming an exchange rate of 1.7500, since the currency of his account is USD we need to convert the exchange rate and calculate the correct amount in GBP $50 * (￡1/$1.75) = 28.57 GBP Now, divide the rest as in the other examples by the stop loss points: ￡28.57/200 pips = ￡0.14/pips Finally, multiply by the known unit/pips value ratio: ￡0.14/pips * [(10,000 units EUR/GBP)(￡1/pips)] = about 1426 units EUR/GBP To be within a predetermined level of risk, Zhang San cannot sell more than 1429 units of EUR/GBP account currency is not any of the currency pairs traded, but the base currency in the conversion currency Zhang San decided to go skiing in Switzerland, during which he used his super spy phone to open a trading account through a local foreign exchange broker He found a very good CHF/JPY market, he decided that if the pair broke through an important resistance level deviating from him by about 100 points, he would Leaving the trade Zhang San is willing to risk only 1% of his 5000 CHF account, i.e. 50 CHF First, we need to find out the value of 50 CHF after converting it to JPY Since the account currency is the same as the base currency of the conversion currency, all we have to do is multiply it by the CHF/JPY exchange rate (85.00) 50 CHF * (85 JPY/1 CHF) = 4250 JPY Now, the rest is the same as the other The example of the same divided by the stop loss points: 4250 yen / 100 points = 42.50 yen / point Finally, multiply it by the known unit / point value ratio: 42.50 yen / point * [(10,000 units of Swiss francs / yen) (1 yen / point)] = about 4250 units of Swiss francs / yen To ensure that the loss is less than or equal to 50 Swiss francs, Zhang San can not trade more than 4250 units of Swiss francs / yen & nbsp;Foreign exchange position management of 4 - foreign exchange position size learning summary after traveling around the world with Zhang San, through the basic position size example, you have been on the road to sophisticated risk managers know how to set the correct position size is only part of becoming a risk management expert, the other part is to have the principle of adhering to their own stop loss settings and predetermined risk appropriate level, you can ensure that in In fact, every time you decide to start trading, you have to calculate and plan your position size properly.