Why dose position size play an important role in forex trading?

Position, a term that is used very frequently in the financial market, is also knows as a financial product contract of selling and buying. The act of buying or selling position is called “open a position”; a position opened just now is called “new position”; and a position you have is called “holding position”. To put it simple, a position is the amount of a security, commodity or currency owned by a trader. Forex traders earn from forex spread through opening a position.

During a transaction, it is important to control the risk by controlling the position size. If you don't know how to control your position, it is difficult to make profits in the forex market. Without an effective method of position control, you will keep losing money during forex trading. A wrong method of position control may cause that you ends up losing money even with a profitable trading system.

How to control the position size correctly with four steps？

1: Stop-loss distance

The stop-loss distance which is the first step in controlling the position is very important. Many forex traders set a large stop-loss distance. Before trading, you need to know your stop-loss level that you should set, and to know the distance between your entry price and stop-loss level. Never change your stop-loss distance at will so that you can keep your position at a reasonable level, and never narrow your stop-loss just because you want to buy more orders.

For forex trading, stop-loss distance is usually measured by points, and a point represents a price unit. For example, the EUR/USD rose from 1.4000 to 1.4001, up 1 point.

2: Set risk level

When your stop-loss is triggered, how much loss you can afford？ Generally speaking, the trader sets the risk level according to a certain proportion of the funds in the account.

Never increase the position size and then adjust the stop loss position to meet the risk level carelessly. Stop-loss is usually set at a reasonable price according to the actual situation in a chart. In addition, the orders risk is usually determined by the size of account funds. The larger the account fund is, the greater the risk tolerance of each position is, and vice versa. This is called variable position size, and the concept is used by many professional traders or other speculators.

3: Order type and point value

For forex traders, position size is measured by the number of orders they make. There are three different types of orders in forex trading: standard orders, mini orders and micro orders.

Different order types have different point value. For example:

1 standard order: 1 point equals to US$10

1 mini order: 1 point equals to US$1

1 micro order: 1 point equals to US$0.1

1 standard order = 10 mini orders= 100 micro orders

For example, an account has US$2,000, the risk level is set at 2% ( risk limit per order is US$40), and the stop-loss is set at 50 points (in the case of a mini order, one point equals to US$1).

Calculation: 40/50=0.8, you can have 0.8 mini order or 8 micro orders

Tips: To create a position size memo. When you open a position, update it in the memo, which will help to improve your decision-making ability. And it also can save you time when you want to check your position size.

It only takes a few minutes to figure out the right position size, but some traders will skip it. In your order, the position size is the only part that you can fully control, so it's important to understand and apply it.

Can I trade without setting a stop-loss？

If you don't set a stop-loss, you will have no idea about your position size. Some traders think it is better to trade without setting a stop-loss, but its absolutely wrong. If you do so, you will not be able to size your position correctly, and your trading orders will continue to increase. The nuances of position size and stop-loss position can lead to huge risk differences and losses of money. Therefore, it is important to keep your position size at a reasonable level if you want to make a profit continually.

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