Proper position sizing is THE single most important skill a forex trader should have. Yup, that’s right – it’s THAT critical!
But before we get down and dirty with the details of position sizing, let’s define it first.
What is proper position sizing?
Simply put, proper position sizing means setting the correct amount of units to buy or sell an asset. In other words, it involves finding the position size that will keep you within your risk comfort level.
Why is it so important?
Oversized trades magnify gains and losses, but capital usually evaporates faster on the downside. When positions are too large, even small fluctuations of a few pips can destabilize your account and force liquidation.
Sure, when you bet big, you can win big. But what happens when you lose? You don’t need to be a brain surgeon to figure that one out – you lose big, too.
Without knowing how to size your positions properly, you may end up taking trades that are far too large for you.
In such cases, you become highly vulnerable when the market moves even just a few pips against you.
How do we prevent ourselves from risking too much?
Identify and acknowledge
Step one is to admit it is even a problem. For example, nobody overeats just because they like chewing. There is usually an emotional payoff hiding underneath.
Trading too big is the same. It is not always pure greed.
For most traders, they realize that their aggressive behavior is tied to their self-worth. They bet big in hopes that they win big. Winning big feels like proof that you are good enough. The trouble is that losing big hurts twice as much and makes you lose control when price wiggles a few pips the wrong way.
The fix is to face it head on. Your account balance does not measure your worth. Once you realize that, you can trade with a clearer head.
Know your limits
You also need to find out your tolerance for risk. Some traders love risk, some hate it.
Do you know where you stand?
Although most forex traders risk a fixed percentage of their account on a trade, there’s no one-size-fits-all method to go about it.
Forget the fancy math for now. Start by asking yourself how much you can lose without losing sleep.
Keep your positions small enough so that even a loss does not rattle you. That way, your brain stays calm, your plan stays intact, and you live to trade another day.
Proper position sizing is not about perfect entries or exits. It is about ensuring you can withstand losses without losing your ability to think clearly. This is what separates sustainable trading from reckless gambling.
