Best Practices for Forex Position Sizing
Why Position Sizing Matters
Position sizing determines how much of your capital you put at risk on each trade. Getting it right is crucial:
- Excessive risk and account blow-ups
- Inconsistent returns
- Emotional trading decisions
- Inability to withstand normal drawdowns
- Underutilization of capital during winning streaks
- Account longevity and consistent growth
- Emotional stability while trading
- Surviving inevitable losing streaks
- Maximizing returns during winning periods
- Objective trade execution
Key Insight: Even the most accurate trading system will experience losing streaks. Your position sizing strategy largely determines whether you can survive these losing periods and capitalize on winning streaks.
The Percentage Risk Model
The most widely recommended approach to position sizing is the percentage risk model:
The Position Sizing Formula
Position Size = (Account Balance × Risk Percentage) ÷ (Stop Loss in Pips × Pip Value)
Position Sizing Example:
- Account Size: $10,000
- Risk Percentage: 1% ($100)
- Trade: EUR/USD
- Entry Price: 1.1050
- Stop Loss: 1.1000 (50 pip stop)
- Pip Value (standard lot): $10 per pip
- Calculation: $100 ÷ (50 pips × $10) = 0.2 lots
In this example, if your stop loss is hit, your loss will be exactly $100 (1% of your account).
Benefits of the Percentage Risk Model:
- Automatic position scaling - As your account grows, position sizes grow
- Protection during drawdowns - After losses, position sizes decrease
- Consistent risk exposure - Each trade risks the same percentage
- Sustainable compounding - Creates a foundation for account growth
Optimal Risk Percentage Per Trade
Determining how much to risk per trade is a critical decision that depends on several factors:
| Risk Level | Per Trade Risk | Suited For | Consecutive Losses to Lose 25% |
|---|---|---|---|
| Conservative | 0.5% | Beginners, smaller accounts | 58 trades |
| Moderate | 1% | Intermediate traders | 29 trades |
| Aggressive | 2% | Experienced traders | 15 trades |
| High Risk | 3%+ | Not recommended | 10 trades |
Alternative Position Sizing Methods
While the percentage risk model is the most broadly recommended, several alternative approaches exist:
Description: Trading the same lot size for every trade regardless of stop distance or account fluctuations.
Example: Always trading 0.1 lots, regardless of the trade setup.
Pros: Simple to implement; no calculations needed
Cons: Does not adapt to account growth or drawdowns; varying risk per trade depending on stop loss distance
Assessment: Not recommended except for testing new strategies with minimal sizing
Description: Doubling position size after each losing trade.
Example: Start with 0.1 lots. If lost, next trade is 0.2 lots. If lost again, next trade is 0.4 lots.
Pros: Can recover previous losses with a single winning trade
Cons: Extremely high risk of account blow-up; requires infinite capital; psychologically challenging
Assessment: Highly dangerous and not recommended for serious traders
Description: A formula that determines optimal position size based on win rate and risk-reward ratio.
Formula: Kelly % = W - [(1-W)/R]
Where W = win rate (decimal) and R = win/loss ratio
Example: With 60% win rate and 1:1 risk-reward, Kelly suggests risking 20% per trade
Pros: Mathematically optimized for maximum account growth
Cons: Often recommends excessively high risk; very sensitive to accurate win rate estimation
Assessment: Most professional traders use "Half Kelly" or less to reduce volatility
Description: Adjusting risk percentage based on setup quality or conviction level.
Example:
- A-grade setups: 1.5% risk
- B-grade setups: 1% risk
- C-grade setups: 0.5% risk
Pros: Allows larger positions for highest conviction trades
Cons: Introduces subjectivity; can lead to overtrading if not disciplined
Assessment: Can be effective for experienced traders with proven track records of identifying high-probability setups
Common Position Sizing Mistakes
Even traders who understand position sizing concepts often make these mistakes:
Problem: Varying risk percentages based on "feelings" about the trade.
Example: Risking 0.5% on some trades, then 3% on "sure things."
Solution: Establish a consistent risk percentage and stick to it regardless of how confident you feel.
Problem: Using the same position size across all currency pairs regardless of volatility.
Example: Trading the same 0.5 lots on both EUR/USD and USD/ZAR.
Solution: Adjust position size based on the specific pair's volatility and your stop loss width.
Problem: Taking full-sized positions in highly correlated pairs.
Example: Risking 1% each on EUR/USD, GBP/USD, and AUD/USD long positions.
Solution: Reduce position size on correlated trades or consider them as a single exposure.
Problem: Increasing position size after losses to "make back" money quickly.
Example: Doubling position size after a losing trade.
Solution: Stick to your position sizing plan especially after losses; consider reducing size temporarily after several consecutive losses.
Advanced Position Sizing Strategies
Once you've mastered basic percentage-based position sizing, consider these more advanced strategies:
Adjust position size based on market volatility using the Average True Range (ATR) indicator:
Position Size = (Account Balance × Risk Percentage) ÷ (ATR × ATR Multiple × Pip Value)
This approach automatically reduces position size during volatile market conditions and increases it during calmer periods.
Example:
- Account Balance: $10,000
- Risk Percentage: 1% ($100)
- Current ATR (14): 85 pips
- ATR Multiple: 1.5 (stop loss set at 1.5 × ATR = 127.5 pips)
- Pip Value: $10 per standard lot
- Calculation: $100 ÷ (85 × 1.5 × $10) = 0.078 lots
This method automatically reduces risk after consecutive losses and gradually increases it during winning streaks:
- Start with a base risk percentage (e.g., 1%)
- After 2 consecutive losses, reduce to 0.75% risk
- After 3 consecutive losses, reduce to 0.5% risk
- Gradually increase back to 1% after winning trades
This approach helps protect your account during losing streaks while still capitalizing on winning periods.
Rather than entering with your full position at once, consider scaling in:
Example - 3-Part Scale-In Strategy:
- Enter with 1/3 of your planned position at the initial entry point
- Add another 1/3 after price moves in your favor by 1× ATR
- Add the final 1/3 after price moves in your favor by 2× ATR
- Move stop loss to break-even after the second entry
Benefits: Reduces initial risk exposure; improves average entry price; allows for larger position size with the same risk
Position Sizing FAQ
Yes, different trading strategies often warrant different position sizing approaches. For example:
- Trend-following strategies may use larger position sizes (up to 2% risk) due to favorable risk-reward ratios
- Range trading or counter-trend strategies might use smaller position sizes (0.5-1% risk) due to higher failure rates
- High-frequency strategies typically use very small position sizes per trade (0.1-0.5%) due to the large number of trades taken
The key is to adjust based on the strategy's win rate, typical risk-reward ratio, and number of trades taken.
As a general rule, limit your total account risk across all open positions to 5-6% maximum. For example, if you risk 1% per trade, you should have no more than 5-6 uncorrelated positions open at any time.
For correlated positions (like several USD pairs), you should reduce your per-trade risk accordingly. For instance, if you have three highly correlated pairs, you might risk only 0.33% on each to maintain the 1% risk on that correlated exposure.
Many professional traders actually keep their total portfolio risk below 3-4% at any given time, which provides a significant buffer against market shocks.
Many successful traders reduce their risk percentage as their account grows beyond certain thresholds. This approach reflects the changing goal from growth to preservation as the account size increases.
A tiered approach might look like this:
- $10,000 or less: 1-2% risk per trade
- $10,000-$100,000: 0.5-1% risk per trade
- $100,000-$1,000,000: 0.25-0.5% risk per trade
- $1,000,000+: 0.1-0.25% risk per trade
This progressive reduction in percentage risk still allows for larger absolute position sizes as the account grows, while providing additional protection against drawdowns.
When using technical stop losses (like below a support level or above resistance), follow these steps:
- Determine your entry price and stop loss price based on technical analysis
- Calculate the pip distance between entry and stop (e.g., entry at 1.1050, stop at 1.0980 = 70 pips)
- Determine your dollar risk (e.g., 1% of $10,000 = $100)
- Calculate position size: $100 ÷ (70 pips × $10 per pip) = 0.14 lots
This approach ensures your risk remains consistent as a percentage of your account regardless of where your technical stop loss needs to be placed.
Conclusion: Building Your Position Sizing Strategy
Developing a robust position sizing approach is a cornerstone of professional forex trading. Here's a summary of key principles:
Core Principles:
- Risk a consistent percentage (usually 1-2%) of your account on each trade
- Calculate position size based on your stop loss distance
- Consider correlation between multiple positions
- Limit total portfolio risk to 5-6% maximum
- Adjust position size based on volatility when appropriate
Implementation Steps:
- Define your maximum risk per trade (e.g., 1%)
- For each trade, identify your entry and stop loss points
- Calculate the position size that limits your risk to the predetermined percentage
- Consider market conditions and adjust if necessary
- Document your position sizing decisions in your trading journal
Remember that even the best trading system will fail without proper position sizing. By managing your position sizes effectively, you create the foundation for long-term trading success and profitability.