Optimize Tricks of Opportunities: Effective Your Forex Trading Capital
One of the most frequently repeated questions I have received while being a trainer in the world of forex trading is, “Sir, if I have $ 10,000, how many lots can I open a position?”
If I remember correctly, there were at least five times I wrote about position sizing on this website – from the general description to the calculation details.
Position sizing is about how to set how many lots you can use in opening a trading position. The main goal is to prevent a trader from being trapped in an overtrade condition, which is a condition when he opens too much position more than he should. Thus, the trader will avoid the risk that is too large because the position taken by itself already takes into account the magnitude of the risk.
But it turns out that what is not widely realized is that in addition to limiting risk, position sizing is also useful to streamline your strategy and capital.
Strategy must match capital
Do you remember the concept of Mind-Method-Money in trading? If you forget, let me remind you again.
Mind is related to your mental attitude as a trader. How you are able to run your trading plan well, discipline and without the slightest doubt.
The method is the method or trading strategy that you run.
Money is your capital. How do you use and manage it.
Our focus this time is on money .
You may quite often get certain trading strategies either from the internet or acquaintances and according to their recognition the strategy is effective enough to gain profits. The question that should immediately emerge from you is: how much capital is needed so that the strategy works well?
Very many trading strategies are claimed to be profitable but it doesn’t work well when you use them. There are several causes, including that you don’t have the right capital for the strategy. It is very possible that a trader who previously successfully carried out the strategy has a capital that is far greater than your capital. So, don’t force yourself to use the same strategy if your capital is much smaller.
Don’t waste your strength
What if you had enough capital? How many lots should be opened for transactions?
Before we continue, it needs to be understood that “power” here means capital. This is closely related to the position sizing mentioned above.
Let’s say you have a capital of $ 10,000, equivalent to one hundred million rupiah. Then you will make a transaction, then the question arises as mentioned in the initial paragraph above.
Indeed, you may open a position only 0.1 lots, for example. But will it be effective to optimize the opportunities that exist? Not necessarily, because that can mean you are wasting your real capital strength.
That is, your forex trading becomes less effective.
How to make trading more effective?
That’s where the position sizing role is.
Remember that in trading you also need to set a maximum loss limit for each transaction. If your capital is $ 10,000 and the risk limit for each trade is (for example) 10%, that means the loss (risk) of each transaction is not more than $ 1,000.
Well, suppose you will make a transaction on EUR / USD. After you have done technical analysis, you see that stop loss should be placed 500 pips from the level of your open position. Assuming quote 5 decimal, where 1 pip (ette) = $ 1, the amount of stop-loss per lot is $ 500.
OK, so with that scenario, how many lots can you open a position?
Here’s the answer: Risk per transaction (USD) / Total Stoploss (USD) = $1000 / $500 = 2 Lot
With the calculation as above, then even if your loss will not exceed your risk tolerance limit. Thus you can still calm down.
Conversely if you make a profit then you have made the transaction far more effective than just opening a position of 0.1 lot, for example.
So it is clear that in addition to limiting risk, position sizing can also make your trading far more effective without fear of losing too much, because you have limited it from the beginning according to your own “level of comfort”.
Are you ready to make your forex trading strategy far more effective but still within the limits of risk tolerance? Use this position sizing trick in your trading account.