Position Sizing & Risk Per Trade

Advanced Money Management For Beginners

It is important to understand that you must trade in order to fit your personality to be successful. This does not mean you can be illogical about your preparation but it does mean you need to find a trading style that fits you. The most successful traders will tell you trading all comes down to money management.

When developing a forex trading system you need to know how much to risk per trade and what your maximum risk per trade is going to be. Let's take a look at how to calculate your risk per trade for maximum profits.

How to calculate risk per trade

Sample size. You should have at least thirty instances of something for a sample size. Even if you had a thousand it is not enough but for the sake of planning you need at least thirty instances to figure out what your max drawdown has been. You will figure this out on a demo or with a trading a live trading account funded with a minimal amount of money.

Your max drawdown / your largest loss (from your sample size) = risk per trade (risk your willing to assume)

For example, let's say you are trading a $2,000 account and your largest drawdown is 30% or $600. Let's say that your largest loss so far (your sample size) is $100 or 5%. Your risk per trade would be $600/$100 or $6 risk per trade 0r 0.3%.

This is just an example on how you figure out your risk per trade. Of course your largest drawdown and largest loss will vary as will your risk per trade.

Going further – Position Sizes

Now if your risk per trade is 0.3% how do you know how big your position size will be?

This can vary depending on the time frame and particular trade setup.

For example if you are trading 0.01 at $0.10 a pip you can have a stop loss of 60 pips ($6.00) to keep your risk per trade to 0.3%.

You can also trade at 0.03 at $0.30 a pip with a 20 pips stop or at 0.06 at $0.60 with a 10 pip stop and keep the same 0.3% risk per trade.