If you’re new to trading you may have heard about position size.
Position sizing is really important because it can help you manage risk and increase your profits.
In this article, I’ll explain what position sizing is and how it works.
We will also provide examples of how to calculate position size for different types of trades.
What is a Position In Trading?
Before we explain position size we need to define what is a position.
When you enter a position you’re essentially betting on whether the price of a particular asset will go up or down. And for assets we mean trading instruments, like Forex, Currencies, Stocks, Indices and so on.
There are two types of positions that you can take: long and short.
A long position means that you buy an asset with the expectation that its price will go up.
A short position means that you sell an asset with the expectation that its price will go down.
What Is The Position Size?
Position size is the process of determining the amount of capital to risk on each trade.
It’s essential to get the position size right because it can help you manage risk and increase your profitability.
If you risk too much on a trade, you could end up losing a significant portion of your account, or even blowing an account.
On the other hand, if you risk too little, you might miss out on potential profits.
Types of Position Sizing
There are two types of position sizing: fixed and variable.
Fixed position sizing means that you keep the same size for all trades, meaning the risk changes position-by-position.
Variable position sizing means that you adjust your position size based on the risk of the trade. Variable sizing is normally used to keep the risk controlled.
Position Size when Trading Stocks
Position Size is quite simple when trading stocks.
A stock has a value per unit of stock and from there it is simple to determine the size and risk.
For example you may go long with 10 shares of Apple, that’s simply your positions size and your risk would be 1,000 $ if each share is 100$. Risk may be different if you have a plan of selling if the stock drops 10$ per share.
Position Size when Trading CFDs
When trading contracts for difference (CFDs) the position size is not as immediate.
CFD usually involve leverage and with this a more complex calculation of risk.
When trading CFDs usually the position size is expressed in LOTS. This is also why saying “Position Size” and “Lot Size” is very frequent.
In most popular retail trading platforms the position size spans from a minimum of 0.01 lots to a maximum of 1000 lots.
Because we are using leverage, usually 1 lot = 100.000 units of the asset traded, especially in FOREX.
So saying you have a 1 lot long position in EURUSD means that you virtually bought 100.000 EUR with the expectation of the EUR to increase value in respect to USD.
Thanks to the wide range of the position sizing CFDs are suitable for both traders with limited account or higher portfolios.
If you are curious around some possible position size for different account amounts check this out.
How to Calculate Position Size
It is important to say that you want to calculate the position size if you want to control risk.
If you aren’t interested in controlling risk then your position is only limited by your balance, or equity.
I will also add, if you aren’t controlling risk, perhaps you shouldn’t be trading, but that’s your choice.
There are different methods for calculating position size, but the two most common ones are percentage risk and dollar risk.
We talk about this topic also in the article of Position Size Calculator for Metatrader.
Position Size per Percentage Risk
Position Size per Percentage Risk is when you are willing to risk a defined percentage of your account in a trade.
To calculate the position size base on a percentage of risk:
- Calculate the risk amount in your currency, multiplying the account balance by the percentage, we’ll call this RISK
- Define the value of each price fluctuation for 1 lot, we’ll call this POINT VALUE
- Define the stop loss in point, we’ll call this STOP LOSS
- POSITION RIZE = RISK : (STOP LOSS x POINT VALUE)
Position Size per Risk Amount
When you have a defined risk amount instead of a percentage the calculation is slightly easier.
Instead of calculating the risk amount from the percentage you already have this information.
From there the process is very similar
- You already have the account amount you are willing to risk, we’ll call this RISK
- Define the value of each price fluctuation for 1 lot, we’ll call this POINT VALUE
- Define the stop loss in point, we’ll call this STOP LOSS
- POSITION RIZE = RISK : (STOP LOSS x POINT VALUE)
By the way, if you need help with calculating the Pip Value or Point Value check this article.
Position Size Example
To understand the concept and calculation of position size it is useful for you to see an example.
Let’s say you have a trading account with $10,000 and you want to go long EURUSD.
Your risk appetite is 1% of your account per trade.
EURUSD is currently 1.10200 and you are going long.
You have a stop loss at 1.00900.
- Your RISK = 10,000$ x 1% = 10,000 x 0.01 = 100$
- The POINT VALUE of a price change of 1 point for 1 lot of EURUSD is 1$
- The STOP LOSS is 1.10200 – 1.00900 = 300 points
- POSITION SIZE = 100$ : (300 POINTS x 1$ per POINT) = 0.33 LOTS
How to Calculate Position Size in MetaTrader
Metatrader is a great trading platform.
It is one of the most popular platforms to trade Forex and CFDs in general.
There are many features on the platform however calculating the position size is not one of them.
Metatrader expects you to select the position size of the trade so you need to have that ready.
You can visit this article to understand more about position sizing in Metatrader.
If you are in a rush, you can download some tools to make the calculation easier for you.
Conclusion
Position size is a crucial aspect of trading that can help you manage risk and increase your profits.
In this article we talked about why it is important and showed you two ways of calculating it.
We also shared the links to some pages to useful indicators that can calculate the position size for you.
We do suggest to always pay attention to risk in the form of stop loss and position sizing, but ultimately it is your choice.
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