Professional Currency Trading: Position Sizing

Amendments to last post. The goal for the past 7 weeks and 80 trades was a stop from 10 to 25 pips with a 50 pip profit target. Most trades had profit factors far greater than 50 pips but I didn’t run trades to full term for the sake of scores and for purposes of precision as I wanted a high Risk Reward Ratio. Roughly 60 or so trades were just so perfectly executed with 10 to 25 pip stops and 50 pip targets. This month’s trades were 31 for 1184 pips and my goal was 30 trades for 1500. The idea this month was less trades for more pips than last month. I chose about 8 currency pairs and followed those prices methodically up and down and I hit highs for longs then followed down for shorts.  I didn’t trade election returns cause it was to easy to earn pips and I felt it was cheating the professional score. Each trade had a goal. For example, multiple longs and shorts were taken in one currency pair. The 6 duds I traded were misses on multiple longs and shorts yet initial targets hit perfectly.

Position sizing is another must know concept to FX professionals and includes

1. Risk Size 2. Value Per Pip, 3. Stop Placement  4. Value of Pip moves. 5. # lots.

Risk Size. Question is what is the risk of an account or better stated how many pips to trade.  Answer: Currency denomination X 0.01 = 1% of account. The basics:

USD $5,000 X 0.01 = 50 pips to trade  at 1%. $5,000 X 2% or 0.02 = 100 pips to trade. $5,000 X 0.03 = 150 pips to trade. $5,000 X 0.04 or 4% = 200 pips to trade. Suppose 10%. $5,000 X 0.10 or 10% = 500 pips to trade. 20%, $5,000 X 0.20 = 1000 pips to trade.

Note percentages. Its the secret to currency trading profits. How much will a $5,000 account grow at 1% and 50 traded pips and how many overall trades. For beginner’s, its perfect. For skilled, not good. I’m deviating a bit from the overall theme of this post to add advice.

2. Value Per Pip.  USD 1% at 50 pips for a 200 pip trade = 0.25 by 50 Divide 200. USD 1% at 50 pips for 150 pip trade = 0.33, 50 divide by 150. 50 divide 100 pip trade = 0.50. USD 1% at 50 pips for 20 pip trade = 2.5

USD 2% at 100 pips for 250 pip trade = 0.40. USD 2% at 100 pips for 200 pip trade = 0.50. USD 2% at 100 pips for 150 pip trade = 0.66. 100 Divide 100 = 1.0.  USD 2% at 100 pips for 50 pip trade = 2.0.

Pip Moves. For EUR/USD 1 divide by 10,000 = 0.0001. Every currency pair has a different pip value. EUR/USD is always offered in examples because its easy. What 0.0001 equates to is 1 pip or 10,000 x 0.0001.  USD/JPY I believe trades at pip values at 0.88 so 1 divide by 100 = 0.01.

Lot Sizes. Per Pip X 10,000 then divide by 1. Assume $5,000 at 1% = 50 pips. A 200 pip trade = 50 divide 200 = 0.25. Lot size = 0.25 X 10,000 divide by USD 1 = 2.5 lots.

Stop Placement. The risk is 50 pips therefore stop is placed at 50 pips or 50 pips from entry.  An imperative is know entry and exit before the trade.

I will expand on the above rules and principles in next post to offer advice and more examples. Also, stops and stop placement will post.

 

Brian Twomey, Inside the Currency Market, btwomey.com,

 

 

 

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