Forex Position Sizing 2 - Shrinking Forex Trading Positions
As mentioned befoforex trading accountse, the obvious benefit of shrinking your position cashback forex to reduce your risk as you reduce your market exposure…… whether you are taking profits or taking losses when used in conjunction with a moving stop, there are also benefits such as locking in gains forextradingaccountsregister creating a near risk-free trade We will show you through a trading example Example of what you should do: Suppose you have a $10,000 account and you are short 10,000 units of EUR/USD at 1.3000 you set your stop loss at 1.3100, your profit target is 300 pips below the entry point, i.e. 1.27001 million units of EUR/USD (the position is worth $1 per pip), with a stop loss of 100 pips, your total exposure is $100, or 1% of your total account A few days later, EUR/USD moves down to 1.2900 pips, i.e. you benefit 100 pips This means your total profit is $100, i.e. a profit of 1% Suddenly, the Fed makes a dovish statement, which may weaken the dollar in the short term You think, this may bring people who are short the dollar back to the market, Im not sure if EUR/USD will go down again…… I should lock in Some gains You decide to buy 5k units of EUR/USD at the current price of 1.2900 and close half of your position This will lock in a gain of $50 [5k units of EUR/USD worth 0.5&hellip per point…… you make a profit of 100 points (100 points x $0.5 = $50)] This leaves you with an open short EUR/USD position at 1.3000 The position size drops to 5,000 units and you can then adjust your stop accordingly to the break-even point at 1.3000 to create a risk-free trade If the pair retraces upwards and hits the adjusted 1.3000 stop, you close the rest of your position without any losses while if it continues to move downwards, you can continue trading for more profits obviously On balance, cutting the size of the position reduces the maximum profit you originally set if EUR/USD eventually drops to 1.2700 and you catch a 300 pip move with 10,000 units of EUR/USD, your profit would be $300 However, at 100 pips profit, you close out 5,000 units for a $50 profit Next, you close out the rest of the position at 300 pips profit for a $150 profit ($0.50/pip * 300 pips = $150) Combined, you made a total of $200, while your original profit was set at $300 The decision to reduce your position is up to you…… you just need to consider the pros and cons of it In this example, which is better for you, to reduce your position so you benefit more, or to have peace of mind by locking in some of your profit and establishing a lossless trade? choice is better for you? 50% more profit, or a good nights sleep? Remember, the market can go down beyond the profit target you set, making your account grow even larger Adjusting your trades is a matter of considering many factors, and through many trading exercises you will find a trade-off trading process that works for you In the next section, we will teach you how to expand your position You may ask, "Why? Why do I need to expand my position? Expanding your position, if used properly, will increase your maximum return but as they say, the higher the return, the higher the risk. If used improperly, your account will shrink so fast you wont have time to press the close button and before you know it, youll be staring wide-eyed at the screen knowing your account received a margin call. So stay focused in class! What separates the right way from the wrong way is the profitability of the positions you open, the timing of your position increases, the number of positions you increase, and how you adjust your stop loss. In the next two sections, well teach you two potential scenarios for increasing your position.