Now that we’ve learned the hard lesson of trading too big, let’s get into how to correctly use leverage using proper “position sizing.”
Position sizing is setting the correct amount of units to buy or sell of currency pair.
It is one of the most crucial skills in a trader’s skill set.
Actually, we’ll go ahead and say it is THE most important skill.
Traders are “risk managers” first and foremost, so before you start trading real money you should be able to do basic position size calculations in your sleep… or at least after you wake up, still groggy, and try to trade the NFP report!
Finding the position size that will keep you within your risk comfort level is relatively easy…and we use the phrase “relatively easy” loosely here. Besides, if Pipcrawler, who can’t tell his pinkies from his toes, can do it, then you can too!
Depending on the currency pair you are trading and your account denomination (is your account in dollars, euros, pounds, etc??), a step or two needs to be added to the calculation.
Now, before we can get our math on, we need five pieces of information:
- Account equity or balance
- Currency pair you are trading
- The percent of your account you wish to risk
- Stop loss in pips
- Conversion currency pair exchange rates
Easy enough right? Let’s move on to a few examples.