Trading in general is subject to market risks and the same rule applies to forex trading as well. And that makes risk management an essential element of successful trading. Determining our risk appetite as a trader and taking well-calculated risks based on our risk tolerance are crucial in this context. And one important part of risk management is position size calculation. Manual calculation can often result in errors, and that’s why some brokers are providing a forex position size calculator as a tool on their trading platform. With this write-up we will see how using a position size calculator in forex trading will help us with risk management.
What is Position Size in Forex
Position size is a self explanatory term as it simply means the size of the position you take in your trades. Basically this would be translated into the monetary value of your trade positions. We can refer to position sizing as an essential skill that needs to be developed by every trader in the forex market. This skill will ultimately decide your trading results in the end. And a position size calculator can be your tool for developing this skill over time.
Position sizing can be defined as setting the correct amount of units to trade with a currency pair of your choice. This trade can either be a long position (buying) or a short position (selling) depending on your trading plan/ strategy. And the calculation will differ based on the currency pair you are trading with and the base currency used for operating your account. That’s why manual calculation of position size can be a complex task to begin with for newbies. Even experienced traders prefer using a position size calculator to save the time that would be needed for these calculations during bigger trades.
Basics of position size
Position size is also referred to as trade size and it is denoted in number of lots. A lot size represents the amount of currency units bought or sold in a trade. Basically, there are three types of lots in forex.
- Standard Lot = 1,00,000 units of a currency = 1 lot
- Mini Lot = 10,000 units of a currency = 0.1 lot
- Micro Lot = 1000 units of a currency = 0.01 lot
In addition to this, some brokers may also provide nano lots which would be equal to 100 units of a currency.
So, you have to denote your position size based on this unit of measurement. Forex size calculator is one of the most important trading calculators that mostly state the result in standard lot size and then you can specify the same while entering a position. When your trade size is smaller, the position size calculations would often result in results with decimal points.
Now, the monetary value of each lot size would differ depending on the currency pair. But we can take the classic example of EUR/USD since it is the most traded major pair.
A standard lot with EUR/USD would mean $10, means 1 lot in EUR/USD = $10
Formula for Position Size Calculation
Position size = ((account value x risk per trade) / pips risked)/ pip value per standard lot
How to Use a Position Size Calculator
Using a position size calculator in forex is quite easy when you already have a well-defined trading plan and risk management plan. Let’s learn how you can easily calculate your position size with a forex size calculator by following these simple steps.
- Specify the Base Currency of Your Trading Account: This is the currency you use for funding your account. Suppose for a person living in Europe, the base currency would be Euro and for someone from the US, their base currency would be USD.
- Specify the Currency Pair: You must have decided upon a particular currency pair with which you will be trading. This needs to be specified for getting results from the position size calculator.
- Specify the Position Size Type: You will either be taking a long position or a short position. It is also referred to as a buy/sell position. When you open a trade to buy the base currency in a pair, it would be a long position. And when your trade position is set for selling the base currency in a pair, that would be referred to as a short position.
- State Entry Price: This is the price at which you will be entering a trade or opening a position.
- Stop Loss/ Exit Price: Not all trades we enter will end up being profitable. And that’s why the practice of placing a stop loss is an integral part of risk management. This will denote the amount of loss you are willing to take before exiting the trade. You have to specify the price level at which you will be placing the stop loss order as the position will be automatically closed once the price hits the SL limits.
- State Account Balance: You have to state the account balance at the time of entering a trade. This is needed to make sure that you have enough capital balance to cover for the loss in case the trade goes against you.
- Risk Percentage: Risk percentage implies the amount of capital you would be risking in a single trade. The golden rule in forex trading is to never risk more than 2% of your trading capital. Risking a small percentage of your trading capital will be ideal to cut your losses and limit the account drawdown as well.
Once you specify or enter all those values correctly, the forex position size calculator would tell you the optimal position size for your trades based on your risk tolerance. Like mentioned in the beginning, a position size calculator is a great tool for risk management in forex. The amount we risk in each trade would determine our profits/losses later on. So calculating the optimal position size for each trade is important to maximise profits and limit losses.
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