
Determining how much of a currency to be used in a trade is very often overlooked aspect of trading. Traders frequently take random position size. They decide to take a larger position if they feel really confident about a trade, or alternatively, opting to take a smaller position if they feel a little less confident. However, this may not be the most informed or strategic methodology for determining the size of an investment.
Before you enter a trade you have to prepare your position. You have to take care of your portfolio and protect it. After analysing where to put your entries, your take profits and your stoploss you have to calculate how big your position size must be.
The first thing you have to understand as a trader is the appropriate stop level for a your trade. Stoplosses should never be set at random levels. A stop should be placed at a level that will provide the appropriate information for the trader, specifically if the trade goes in a different direction as planned. If a stop is placed at an inappropriate level, it may easily be triggered by normal movements in the market. So your stoploss is set where the trade set-up is invalid.
In the following example we set our stoploss at 5% and our target at 10%.
Suppose we have a $10,000 account and we want to risk 1% of our portfolio with the trade. In other words, the amount we risk losing with our trade setup is $100.
The amount we work with should be calculated as follows:
Trade amount = $ Risk / (SL % /100 )
Trade amount = $100 / (5/100 )
Trade amount = $100/0.05 = $5000