Let's Talk About Position Sizing
|One of the questions I get most often is: Could you give me some guidance regarding what kind of Trade Management guidelines to use with my trades?
I have seen various opinions about risk and position sizing. Although it is always a personal decision based on risk tolerance and other factors, it seems risking between 1-2% of your account per trade is a prudent and practical approach.
I recommend focusing on your overall portfolio - IRA's, 401k's, pension plans, brokerage accounts etc. Use that total value figure as your baseline. Forget about the drawdown on your FX account.
For example - if your portfolio collectively totals $200,000 then risking 1-3% of that value ($2,000-$6000) on a per trade basis in your FX account is reasonable.
Sure, if your FX account had a balance of $20,000, you might take a hit, however, the reverse happens on the upside. If you have a winning trade of $5,000, you look at what that means to your overall investments.
If you lose $2,000 or 1% of your portfolio, it’s not a real big deal. You can recover from that so my recommendation is to use the leverage afforded you in your FX brokerage account and trade based on your total investable assets.
Naturally, you never want to pick a percentage that is too big (over 5%) because consecutive drawdowns in that scenario can make it difficult to recoup your losses. The chart below illustrates that better than any words.
There is certainly more to discuss on this topic but that will be enough for today’s update. Part 2 on this very important topic will be posted on July 21st.
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