UPDATE (January 2008) I've created an AJAX forex position size calculator that performs the calculations for you.  You can find it at http://www.forexcalc.com

Here is a complete checklist to determine the most important aspect of money management, position sizing.

1. What is my account balance?    $4234.58

2.  What percentage of my account balance will I be risking?    1.0%

3.  What is my stop loss on this particular trade?    50 pips

4.  What currency pair am I trading?    GBP/USD

5.  How much is a pip worth on a 10K (mini) account?    $1 

6.  CALCULATION  What is my dollar risk amount? (Account Balance x Percentage Risk)  $42.35 

7.  CALCULATION  What is my position size (Dollar Risk Amount x 10000) ÷ (Stop Loss x Pip Worth)

NOTES

1. None.
2. It's up to you to determine what percentage of your account balance that you want to risk.  I've heard traders risking from 1.0%-5.0% per trade.  I risk no more than 1.0%.
3. It's important to determine what your stop loss will be before continuing with the checklist.
4. None.
5. This is the hardest to determine by hand with the exception of currency pairs with the USD in the quote currency such as the GBP/USD, EUR/USD, and AUD/USD.  These currency pairs always have a pip worth of $1 on a 10K (mini) account.  For other currencies, it's easiest to use a pip value calculator. Make sure you use the pip value from the "Lot 10,000" column.
   
6. This is easy.  Take the account balance and multiply it by .01 (1.0%), .02 (2.0%), etc. to obtain your dollar risk amount.
7. This is the most important calculation.  Do it right.
   

EXAMPLE #1 (Answer questions 1 - 7)

1. $4234.58
2. 1.0%
3. 50 pips
4. EUR/USD
5. $1
6. USING A CALCULATOR-> ($4234 x .01) = $42.35
7. USING A CALCULATOR-> ($42.35 x 10000) ÷ (50 x $1) = (423500) ÷ (50) = 8470 units

What you might be thinking... I can only trade a mini-lot which is 10,000 units.  This is more than my calculated position size.  This means that you are under-capitalized.  You need more capital to trade mini-lots.  Another option is to use a variable-lot size broker like Oanda where you can specify 8470 units.  Another option is to risk a smaller percentage per trade (use 0.5%.)

EXAMPLE #2 (Answer questions 1 - 7)

1. $10582.26
2. 2.0%
3. 75 pips
4. USD/JPY
5. $0.8829
6. USING A CALCULATOR-> ($10582.26 x .02) = $211.65
7. USING A CALCULATOR-> ($211.65 x 10000) ÷ (75 x $0.8829) = (2116500) ÷ (66.22) = 31962 units

In this example, you could enter a trade in the USD/JPY with 3 mini-lots or 30,000 units.  If you have a variable-lot size broker like Oanda, you can enter a trade with 31,962 units.

There may be a better or quicker formula for calculating position size.  This method works but if you know of a more efficient way, let me know.

Read or add comments about this item.

No. 1 :

nice writeup... Thanks.

Submitted by Forex Trader • 2007-12-18 12:21:42

No. 2 :

Thanks.

Submitted by Forex Trader • 2007-12-18 15:56:39

No. 3 : Great stuff

Thanks for this example. I've read lots on this but was baffle when applying to forex. Great blog, how long have you been trading forex? Do you consider yourself an experienced forex trader?

Submitted by Forex Trader • 2008-01-06 16:41:04

No. 4 :

Thanks for the kind words. I've been trading about 2 1/2 years now so yes, I'm experienced but unfortunately not profitable.

Submitted by Rich • 2008-01-06 17:35:25

Please keep your comments brief and on topic, and remember that this is not a discussion thread.
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