Risk management is one of the most important aspects of forex trading, as it is crucial in ensuring that your account holds positive in the long run. Proper position sizing is a necessary skill in practicing good risk management.
Position sizing refer to specifying how many units or how much of your account you will risk in a particular trade. It is not enough to determine the percentage risk per trade or the dollar amount that you are willing to lose. You need to be able to know how to convert this percentage or amount to the number of units you need to buy or sell for a currency pair.
This way, you'll be able to prevent yourself from risking too much on a single trade. It can also prevent you from getting surprised when your losses are too huge or if your wins are too small. Calculating the correct position size will give you an idea of how much you stand to lose or how much you could win on a trade.
To start, you need to determine how much of your account you will be comfortable with losing in case the trade does not go your way. From there, you need to get the pip value of the pair you are trading. Using these variables, you can then calculate the number of units to trade.
Of course you also need to remember that with greater risk comes a greater potential for reward and a lower risk could mean lower profits as well. You need to be able to toe the line between risking too much and risking too little. After all, you do not want to have a small profit potential after all the hard work you put in analyzing the markets and coming up with a good trade setup.
At the end of the day, sticking to proper position sizing and good risk management practice can be the determining factor of your profitability. This will prevent you from blowing up your account in a string of losses on a few trades and will enable you to adjust your risk preferences depending on your confidence on the trade.
This takes a bit of time to master but there are software programs or online tools that can help you calculate your position size by simply supplying the account balance, percentage risk, currency pair, and stop loss size. However, if you want to be extra careful, you should also be able to do this on your own.