The so-called gradual sizing has recently been a popular sizing technique among forex traders. This technique changes the size of the position based on the predicted profitability.
It simply means that as circumstances change (because important information comes out, new analyses are performed, etc.), traders decide whether to increase, decrease, or keep the size of their open positions.
Before we get into a couple of different sizing options, we have to realize that not all sizing techniques are available for all traders. Unfortunately, it all depends on your capital base – the higher the capital, the more sizing options available (if you have a 100 USD on your account, you’ll have a hard time sizing trades the size of ten lots).
Traditional trade sizing
One of the easiest and most popular sizing techniques among traders is traditional sizing, which depends only on the size of a trader’s capital. In this type of sizing, the risk of loss is the same for each open position (the risk of loss is chosen by each trader individually and according to that, the trader then chooses the profit loss ratio for each position).
Traders incorporate in their trading strategy how many percent of their capital per open position they are willing to lose and then they set (usually based on analyses) the probability of loss for any open position (e.g. 60%). Then they choose the risk loss ratio, which then defines where to place the stop-loss and take-profit orders.
To make the counting easy, let’s say the initial capital is 100 USD. The trader decides he is willing to lose 5% (5 USD) of his capital per open trade. After previous analyses, he also decided that the risk of loss per open position is 60%, and that is why the ration between take-profit and stop-loss has to be higher than 6:4 (profit:loss) and after performing simple division, that makes 1,5:1.
Now we know the necessary values and the trader knows how to choose a position size and that he has to place a stop-loss order where the maximum loss is 5 USD (the accepted loss of capital). The take-profit order is placed last, according to what the ration between profit and loss the trader set up, but this ratio can’t be lower than 1,5:1, because that would foreshadow the trader suffering losses long term.
Sizing using the estimated probability of the risk of loss
This type of sizing is noticeably more complicated compared to the traditional sizing technique, and that is why it requires sufficient trading experience. Unlike in traditional sizing, the trader doesn’t choose the same risk of loss for every open position – it differs.
That is why it is necessary to create your own “individual” table, based on which you will, depending on the determined risk, set the position size and the ration between profit and loss (take-profit/stop-loss).
The table above was created only to serve as an example. Every trader should adjust the data in the table according to his own needs.
Every sizing technique requires the trader to set the highest acceptable loss per position in percent, which serves to protect the trader’s capital. Additionally, every trader creates his own analyses for each individual position based on which he then determines the expected probability of loss for each open position.
Based on the probability of loss, he then (using his own table) decides on the size of the position that is being opened, the ration between profit and loss, and the percentage of his capital that he is willing to risk for that position.
There is no recipe for what values should ideally be in the table, but the rule is usually that the higher the risk of loss, the less the trader should be willing to risk (or he should not enter the trade at all).
That is why a lot of times when the risk gets higher, the position is sized down, the profit/loss ratio is increased, or the highest acceptable loss per position is decreased.
The trading capital is 100 USD. Based on analyses, the trader comes to the conclusion that the probability of the risk of loss is 35%. That means he is willing to risk 4% of his trading account at most (4 USD -> maximum stop-loss order). The trader has also determined in his table that the position size for this risk of loss is 2 lots and that the ratio between profit and loss is 3:1.
Unlike traditional sizing, the trader should stick with the ratio between profit and loss (determined in the table) and not change it over time. Based on the profit/loss ratio, the trader calculates the take-profit order.
There are countless sizing techniques. We’ve mentioned two that are broadly used in the professional trading circle. Without sizing, trading is just gambling and a way to lose money.
We are currently working on another article on this topic where we will introduce more ways of sizing.
You can try various sizing techniques without risk and for free on the Purple Trading demo account, which you can set up on our website: https://www.purple-trading.com
About the Author
We all know that trading Forex is a risky business and we encounter risks with each trade on a daily basis. It’s our duty as traders to protect our capital from these risks as much as possible.
One of those ways is providing strategies (or better-said trades) for other traders to copy. This is generally known as copy trading and can be very profitable for both the strategy provider and the copier. For strategy providers, it is a great way to boost your earnings that can range from very little at the beginning to something that can be your main source of income once you amass enough followers.
Recently, the hottest topic in the world of financial markets is the planned ESMA regulation for sure, not only restricting trading binary options completely, but it also limits the use of financial leverage followingly:
In investing and in life generally, we want to pay for assets, products or services that are at least at a fair price in order for those to be valuable in the longer term.
Consequently, it makes sense to leave trading to those that are really good at it if you are someone who doesn’t have the time to analyze the Forex charts on a daily basis. One of the simplest ways to do that is to start copying trading signals from Forex traders who are already profitable. However, profits are not guaranteed and there are certainly some dirty practices in this sphere of Forex trading as well.
Generally, it is seen as something negative and everybody wants to avoid it, but experienced traders realize that losing is the only thing we can control through money management.
The approach towards losses is clear: they have to be as small as possible. The lower a loss is the better.
Specifically, there are two key aspects of your account statement that give a valuable insight into how well you are performing as a trader. Essentially, these two key aspects are the relationship between your average winning trade to your average losing trade and the win per trade ratio or also known as the winning percentage.
Are such worries legitimate and is the forex as we know it coming to an end, or is it all just about the transition from gambling to trading for some traders?
A common question in the Forex community, especially asked around a lot by rookie traders, is whether fundamental analysis or technical analysis is better to trade the Fx market.
There are countless ways for traders to improve their trading sessions. Below are a couple of tips that can be used with almost any trading strategy.
Get to know price action and important price levels on the charts
Price action is, without a doubt, one of the most powerful weapons of many traders today. Price action usually has the highest predictive value because it’s not created by complicated calculations, but by the market.
In fact, many of the crucial skills for success in investing or Forex trading are skills that successful people in general possess which help them to get ahead in all areas of their lives.
Anyone who is into Forex trading more seriously has probably started with one ultimate goal – to be able to live from the generated profits by trading the currency market. Novice traders, however, commonly misunderstand how this can be done - largely due to misleading advertisements and sales schemes by Forex companies.
So, without any further ado, let’s get into clearing up some misconceptions regarding Forex trading as a source of income and how much capital would one need to deposit in their Forex account in order be able to generate an income from it.
When trading using trend lines, you are waiting for a moment when the price of an instrument gets to a certain price level, off of which the market is very likely to bounce.
When using this strategy, every trader has to remember that the market can react two different ways:
Values-Driven Forex Traders are generally independent individuals that are able to make good and rational decisions. They tend to be realistic, they know what their values in life are and they are mainly driven by them – including, to a large degree in trading as well.
Generally, those values for them would be people and relationships, life principles and material possessions.
We often hear that we should not plot too many lines and/or indicators on our charts when we trade Forex. This advice and the reasons cited behind it are certainly valid.
Stop-loss trading orders are one of the most important parts of every forex trader’s strategy. Naturally, there are traders who are brave enough to trade without stop-loss orders or other kinds of capital protection, but it can be very hard for them to achieve stable results long-term.
This type of a trader, however, will often find it very helpful to work in a group or together with others. Even letting someone else trade their money is a very good option for them since they lack a lot of key qualities that are important for traders.
Having others trade for them can be a much better way for those who simply are not suited for the trading arena. After all, they might have another job and be really good at other things but not everyone can be great at trading, and realizing that is an important part of being successful. Once one is aware of their weaknesses they can deal with them in an appropriate manner and one way to do it in case of trading is to let a professional trade for you.
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