Position-Sizing Strategies for Forex Traders

The benefit of position sizing is to help traders predict and control the effect their trades have on their portfolio's value, and the staff at ForexTraders.com offers some methods here.

Selecting a suitable position sizing method can affect your success as a forex trader as much as choosing a direction to trade in the forex market.

As a result, experienced foreign exchange traders strongly recommend incorporating a position sizing technique into your trading plan that takes your trading portfolio size into account.

This position sizing strategy will help keep you from taking on excessive risk that may make trading losses that much harder for your account to recover from.

Position Sizing Strategies 
Position sizing represents a key element of a good money management plan. Successful forex traders usually know precisely what percentage of their trading account will be placed at risk with any given trade.

They will also usually avoid extending the risk they take when trading beyond the limits of their trading account's expendable funds.

Nevertheless, increasing position sizes as your account grows makes some sense since the overall level of risk taken remains the same.

In addition, reducing the size of positions in volatile markets can cut down on risk considerably. Conversely, trading in larger sizes when the market seems more peaceful may also prove to be a profitable strategy.

Some of the more popular position sizing methods used by successful traders to manage their risk are detailed below.

Fixed Lot Sizes - Those traders who prefer to keep their trading rules as simple as possible, perhaps the simplest position sizing technique involves only trading in a certain lot size whenever positions are taken. This standard trading size should generally have a manageable risk associated with it that can be easily assimilated into the trader's account should the worst case occur. Also, as a portfolio grows or decreases in size, the trading size may be increased or reduced accordingly.

Fixed Risk Position Sizing - A somewhat more complex position sizing algorithm would involve taking positions using a risk basis calculated as a certain fixed percentage of the portfolio's total value. When using such a position sizing strategy, traders with larger portfolios would take higher risks on each position, but those with smaller portfolios would take lower risks. This assists the trader by assuring that no single position will empty their trading account.