Position sizing is a technique for determining and modifying the number of trades you buy or sell before entering each trade. This technique is crucial for reducing risks to an assumed proportion and maximising gains per trade. Investors use it to calculate the number of units or lots of each tradable financial instrument, such as forex, stocks, currency pairs, or shares. The size of a trader’s position is typically chosen at random. If traders are more confident in the trade, they might take a greater position; if not, they might take a lesser stake. Yet, this style of operation is not the best strategy for deciding how much money they should invest. As the financial markets are quite risky, instead of allowing chance or a predetermined position to determine the size of their position in trade, traders are encouraged to develop an informed strategic technique.

Rules for position sizing are crucial for trading. It first aids in figuring out the magnitude of the position. Also, it informs you of the appropriate number of lots for each trade you execute. Estimating the capital you wish to place on each trade requires considering several variables, including your expertise level, risk tolerance, and account size. You can significantly reduce the risk in your portfolio by using proper position sizing in your trade.

Formula to calculate Position Size:

Position size = Amount you’re risking / (stop loss * value per pip)

There are two ways to calculate Position sizes– Manual and Automatic.

Manual Calculation– In the manual calculation method, you must put the values in the formula and go through the complex process. This type of calculation is time-consuming and hectic. Also, there are higher chances of making mistakes.

Automatic– Because manual calculation is intricate, the automated method was introduced to all traders. Position size calculators are automatic trading tools that help traders calculate position sizes without having to swirl in the complex calculation process. You must feed the data; the calculator will give results within seconds. Also, there are lower chances of making costly errors. To get precise position sizes, enter the entire capital, daily risk, and the number of trades daily, and stop loss into the position size calculator. When choosing the ideal lot size in the account base currency, the pip value and market rate of the selected cross are considered. With the position size calculator, you can easily decide how many currency pairs you should buy or sell. Also, it will enable you to minimise risk while maximising returns.

Conclusion

Proper position sizing is crucial to trade profitably; hence you must use tools like position size calculators. These trading tools also help with risk management by calculating the position size in units and lots. Furthermore, a position size calculator can help traders of all experience levels trade profitably. Yet, the tool is vital for new traders because it may be required to warn them about the potential risks of trading large lot sizes.