Forex Education

Trading industry knowledge. Learn forex trading, investing in stocks, commodities.

  • Home
  • Choose a broker
  • Best Forex Brokers
  • Learn trading
  • Affiliate
  • Contact
  • About us
Home » Education » Finance education » The Best Position Sizing Methods in Trading

The Best Position Sizing Methods in Trading

by Fxigor

Table of Contents

  • What is position sizing?
  • Trading position sizing strategies
  • Contract size value. The fixed lot size value
  • Fixed Dollar Value
  • Fixed Percentage Risk
  • ATR position sizing
  • Kelly Criterion position sizing
  • Averaging down
  • Maximal drawdown position sizing
  • Monte Carlo simulation position sizing
  • Custom position sizing technique
  • Position sizing and leverage
  • How many pips per day is good?
  • The Bottom Line

The main aim of traders in any financial market is to make a profit and large profits whenever possible. They look for trades that can give them 2X, 5X, 10X, and more profit. Getting such traders is possible, but in search of those trades, it is also possible that you may get the same X losses.

Thus, to avoid wiping off your capital, placing position sizing techniques are important. It helps in avoiding major losses in a single trade. The bigger the risk you take, the bigger the loss-making chances. That is why all successful traders, regardless of their domain like forex trading, equity, or index trading, prefer having position sizing methods in place.

BEST BROKERS REVIEWS
avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

What is position sizing?

Position sizing represents the procedure that determines the number of units invested in a particular security. In simple words, position sizing calculates how much capital traders or investors allocate to a given trade within a particular portfolio. Optimal position sizing reduces the portfolio’s risk, and it is a crucial procedure in trading risk management.

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

BEST BROKERS REVIEWS
free course banner

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

Most successful traders believe that it is also better to minimize your risk than to take more risks. This article discusses four methods that would help you understand position sizing techniques and how you can implement them.

Mostly used position sizing methods are: contract size value or fixed lot size value, fixed dollar value, fixed percentage risk per trade, volatility-based position sizing, Kelly Criterion, averaging down, maximal drawdown position sizing, Monte Carlo simulation position sizing, and custom position sizing technique. 

The best position size method based on most traders is the Kelly criterion technique. It calculates position size based on past performance and uses the calculation’s winning rate and risk-reward ratio.

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

Trading position sizing strategies

Position sizing techniques are

BEST BROKERS REVIEWS

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

free course banner
fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm
  1. Contract size value. The fixed lot size value
  2. Fixed Dollar Value
  3. Fixed Percentage Risk
  4. ATR position sizing
  5. Kelly Criterion position sizing
  6. Averaging down
  7. Maximal drawdown position sizing
  8. Monte Carlo simulation position sizing
  9. Custom position sizing technique

Contract size value. The fixed lot size value

A lot of commodity traders and index traders utilize this position sizing method. You can easily mitigate your risk and also take advantage of the fast-moving market.

Commodity traders very often have fixed contract values that use in trading. In forex trading, traders often use a fixed lot size (fixed micro-lots or fixed mini lots or fixed lots). This is the simplest position sizing method. The fixed lot sizing method disadvantageous because it doesn’t calculate the current risk, investment value, and volatility.

As per your trading exposure and experience, you can increase your portion size eventually. You can start with a mini contract and then reach the label of standard contracts.

Fixed Dollar Value

Fixed dollar value is a position-sized technique where traders choose a fixed dollar amount for risk in each trade and represent the easiest position sizing technique.

This is one of the easiest position sizing methods. If you are new in the trading realm, this technique will help you even if you have limited trading amounts. All you have to do in this method is fix a particular amount for each trade you take up.

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

Let us take an example. If the trader has $5,000 trading capital, he can decide to trade $100 per trade.

Fixed Percentage Risk

Fixed percentage risk per trade represents a position-sized method where traders define risk percentage for each trade and fixed percentage risk for the whole portfolio.

Just like fixed dollar position sizing methods, this method is also straightforward to use. In this method, traders decide a certain percentage of their total capital to take each trade. It depends on the financial market you are trading in, but having a risk of around one or two percent is ideal. For forex, this kind of anti-martingale position sizing method is beneficial.

Position sizing example: If a trader has a trading capital of $100,000 and 1% risk per trade, he can risk $1000  using this position sizing technique. If a trader has a trading capital of $100,000 and 1% risk per the whole portfolio, then he can risk, for example, two trades per 0.5% ($500 per trade) or four trades per 0.25%  ($250 per trade), etc. using this position sizing technique.

In this method, you focus more on percentage instead of dollar value. If you increase your trading capital, your risk-taking appetite would automatically increase. And in case you decide to reduce your capital, it would adjust automatically. Thus, it’s also an anti-martingale strategy.

ATR position sizing

ATR position sizing or Volatility-based position size represents the position sizing method where position size is calculated based on volatility measures such as the Average True Range.

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

Position size =f (ATR)

eurusd daily volatility - eur usd forex time

On image is presented EURUSD ATR, volatility measure. A higher volatility means lower position size, and low volatility means higher position size.

volatility as risk example eurusd 2020

Kelly Criterion position sizing

Calculate position size using Kelly criteria represents a method where traders can calculate position size based on winning rate and risk-reward ratio.

Traders can calculate how to increase position size based on past performance using the equation:

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

Position size = Winrate – ( 1- Winrate / Risk Reward Ratio)

 

Averaging down

Averaging down is the process of buying more shares or more fx lots of a position (scale-in) when the price of the underlying asset is dropping (or sell when price rising). In this position sizing method, the average down technique means that traders keep adding contracts/shares/lots if the market moves against them.

This method can be dangerous if the risk is too high when the traders’ uncontrolled trade against the main trend. However, this strategy can decrease loss.

Famous trader Joel Kruger, often in his strategies, builds position using several smaller positions at different trading times.

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

For example, a trader can buy EURUSD at 1.3, buy 5 mini lots at 1.3, and later 5 mini lots at 1.298. In this case, he will decrease loss and increase the profitability of trades.

Maximal drawdown position sizing

Maximal drawdown position sizing is a technique where traders calculate position size based on maximal drawdown. There are various formulas, but the goal is to create a large profit with a small loss.

Monte Carlo simulation position sizing

Monte Carlo simulation is a position sizing method used to model different outcomes when the algorithm repeated random sampling to obtain numerical results. Usually, using maximum drawdown calculates the likelihood that a future drawdown will stretch to a certain dollar amount. This technique is just one continuation of the maximum drawdown position size technique.

Custom position sizing technique

Prop companies and traders create special formulas to calculate position size based on volatility, drawdown, past performance. There are a lot of money management equations, models that calculate position sizes and portfolio risk.
For example, “The Fama and French Three-Factor Model” is most used in prop companies and corporations.

Position sizing and leverage

In forex trading, having leverage is one of the biggest advantages. Leverage is a double-edged sword in trading. It gives you wings to fly high. Most of the trading platforms give the leverage of around 50:1, 100:1, and even 200:1.

You have to keep in mind that as leverage would give you large profits, you will have the same losses if the trades move against you. And also, having leverage doesn’t mean that you have to use it.

It would help if you used a lower level of leverage to reduce the risk you take.

How many pips per day is good?

There is no exact rule on how many pips per day is good. However, each currency pair has different volatility values, so the only solution is to calculate the number of pips for your target and stop-loss using position size strategies.

For example, 30 pips can be in some moment 10% of the daily average true range, and some other day when volatility is low, 30 pips can be 50% daily average true range.

 

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

The Bottom Line

While traders always want to earn big and become millionaires, it is always advisable to have position sizing techniques to save capital in trading. No day should be your last day of trading because of taking large-size trades.

You may have heard the phrase that does not put all your eggs in one basket, right? Diversification is the key, and position sizing is the risk management tool to do so.

At the closing, let us quote one famous saying, “If you can’t sleep at night thinking about your open position, you are risking too much.”

  • Author
  • Recent Posts
Fxigor
Fxigor
Trader at Leanta Capital
Igor has been a trader since 2007. Currently, Igor works for several prop trading companies.
He is an expert in financial niche, long-term trading, and weekly technical levels.

The primary field of Igor's research is the application of machine learning in algorithmic trading.

Education: Computer Engineering and Ph.D. in machine learning.

Igor regularly publishes trading-related videos on the Fxigor Youtube channel.

To contact Igor write on:
igor@forex.in.rs
Fxigor
Latest posts by Fxigor (see all)
  • How to Invest in Gold?
  • How to Invest in Silver?
  • Are PAMM Accounts Safe?

Related posts:

  1. What is 2IC Position – 2IC Role Meaning?
  2. How Long Can You Hold a Forex Position?
  3. XM Deposit and Withdrawal Methods in 2023.
  4. What is a Good Trading Expectancy? – Expectancy Formula
  5. How to Set Day Trading Targets?
  6. How To Get Into Forex Trading?
  7. What is Forex Grid Trading Strategy and How to Use It? Free Grid EA Download.
  8. Historical Time and Sales Data in Forex Trading
  9. How to Create Profitable Trading Setups?
  10. Options Trading vs Forex Trading
  11. How to Use Leverage in Forex trading – Forex Trading Leverage Explained

Filed Under: Finance education

Trade gold and silver. Visit the broker's page and start trading high liquidity spot metals - the most traded instruments in the world.

Trade Gold & Silver

Diversify your savings with a gold IRA.

Gold & silver portfolio-building assistance from product professionals.

VISIT GOLD IRA COMPANY If you want to trade stocks try: TRADE IDEAS

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

Website categories

Main Forex Info

  • Forex Calendar 2022
  • Forex Holidays Calendar 2022 – Holidays Around the World
  • Non-Farm Payroll Dates 2023.
  • Fed Meeting Schedule 2023. Dates! – FOMC Dates
  • Key Economic Indicators For a Country
  • What is PAMM in Forex?
  • Stock Exchange Trading Hours

Main navigation:

  • Home
  • About us
  • The Best Forex Brokers of 2023 (Ranked & Reviewed)
  • Free Forex Account Without Deposit in Autumn of 2023.
  • Best Forex Affiliate Programs in 2023.
  • Best Forex Brokers by Monthly Traffic of 2023
  • Brokers That Accept PayPal Deposits
  • Forex brokers reviews
  • Investment
  • Education

Forex social network

  • RSS
  • Twitter
  • FxIgor Youtube Channel
  • Privacy Policy
  • Contact us

Spanish language

Spanish language website
Risk Warning: Trading leveraged products such as Forex and CFDs may not be suitable for all investors as they carry a high degree of risk to your capital. Trading such products is risky and you may lose all of your invested capital. Before deciding to trade, please ensure that you understand the risks involved, taking into account your investment objectives and level of experience.

Copyright Forex.in.rs 2007

Privacy Policy