The importance of managing position sizing in trading

[FXOcrypto]

Position sizing is a fundamental factor in trading to manage risk. This concept is used to determine how much capital is allocated in trading.

Proper position sizing can minimize the impact of risk in trading so that in one trading transaction we do not experience a margin call too quickly due to using a position size that is too large.

Determining position sizing is closely related to the leverage used. As is known, leverage is like a double-edged sword. On the one hand, you can increase profits, on the other hand, the risk is higher.

Ideally, high leverage allows traders to create higher position sizes than low leverage, but the impact can narrow the margin level that measures account strength.

Things that need to be considered when making position sizing are risk tolerance and market volatility.

To determine risk tolerance, each trader may have a different method. Some determine based on the risk percentage, and some determine based on the value in dollars.

In determining the stop loss, the trader has previously calculated the risk tolerance in a trading plan and will adjust the position size to adjust the stop loss to the risk tolerance.

For a broader and more comprehensive explanation of position sizing, you can visit the FXOpen blog and find the article with the title Optimal Position Size May Reduce Risks

 

[Mike30]

Hello @FXOcrypto, could you put an example of how position sizing could minimize the impact of risk in trading?

 

[FXOcrypto]

A simple example like this. if we use the standard contract value then 1 lot is equal to 100,000 units or 100,000 USD and the value per pip for each price change in a pair is $10, if we use capital, for example, $1000 and we have a transaction with 1 lot then the price moves against our trades by 100 pips, then we get a margin call where the order is automatically closed by the broker because it has reached the margin call level, but if we use a position size for example 0.01 lot then the value per pip becomes 1 USD if our order is against the trend of 100 pips then it is the same as 100 USD and still has a capital strength of 900 USD.

 

[Mike30]

Oh ok. So it minimizes the amount at risk and from getting a margin call which the margin call along increases the risk exponentially. Did I understand it correct?

 

[FXOcrypto]

Oh ok. So it minimizes the amount at risk and from getting a margin call which the margin call along increases the risk exponentially. Did I understand it correct?

A margin call is a condition where the account equity is getting smaller, where when the margin call level is reached the broker will automatically close the order until the margin level is above the margin call level. Exponentially, if you use a large position size, the risk will be even greater

 

[Mike30]

A margin call is a condition where the account equity is getting smaller, where when the margin call level is reached the broker will automatically close the order until the margin level is above the margin call level. Exponentially, if you use a large position size, the risk will be even greater

I have never used margin. I use cash accounts. I consider in my position that leveraging the use of margin will only increase the already existing risk when trading. Sometimes I believe the market moves just to trigger stop orders and to trigger margin calls. (maybe on purpose or just as a reaction of the market itself)

I know how important are stop orders, but I think they also cause you to exit from successful trades as well. What are your thoughts on stop orders?