EUR-USD analysis, and the correct POSITION SIZING in Forex
For the next three weeks, I will be on vacation but before, my analysis on EUR-USD and a little lesson about opening the correct POSITION SIZING in a trade.
If EUR-USD closes above the blue trendline, there will be a bullish signal with the target area at 1.1883/1.1892 and the stop loss at 1.1560/1.1565.
Before click on "BUY" or "SELL" you have to decide not only the stop loss and target (as you can see in the chart above) but also the maximum loss you are willing to suffer, in the case your operation doesn't go as you have analysed.
This is a fundamental aspect because you must always to put yourself in the best condition to do trading and a loss never have to give you stress and cause problems to your account.
There are different ways to calculate the position size depending on the type of market. Following, you will see the calculation for the Forex market.
So, I will show you how to open a proper Forex position based on your risk appetite. In such a way, even though the currency pair reaches the stop loss, this will not create any problems for your account and stress for you.
I do that, by taking as an example the analysis above on EUR-USD. Let's say you buy the currency pair at 1.1730 with, as you have seen, the stop loss at 1.1560. Your maximum loss bearable is $ 200. How much do you have to invest in this trade? You obtain the position to open with this formula:
Position Size = / value 1 pip
Where: MAX LOSS is your maximum bearable loss you ($ 200); PIPS OF STOP is the distance in pips between the entry price and the stop loss; VALUE OF 1 PIP is the minimum value of a pip for $ 1,000 of purchase/sale of EUR-USD.
For the last parameter, for calculating the value of 1 pip of a currency pair, I don't want to insert link to my or other websites. On Google, you can find several tools for getting this value.
Returning to the example, the position size to open is as follows:
Position Size = / 0.10 = $ 11,764
If you establish the maximum loss not with a fixed amount in dollars (or in your currency) but with a percentage, the formula varies as follows:
Position Size = / value 1 pip
Where CAPITAL is the amount of money in your trading account, and %OF MAX LOSS is the maximum percentage of your capital you are willing to lose in the trade.
If for example, you have a capital of $ 50,000 and your maximum loss is 0.75% of your capital. The position size to open is:
Position Size = / 0.10 = $ 22,058
This aspect of trading is as simple as little used and is the first step to become profitable. I hope this brief lesson help you to improve your trading.
Good summer everybody!!
If EUR-USD closes above the blue trendline, there will be a bullish signal with the target area at 1.1883/1.1892 and the stop loss at 1.1560/1.1565.
Before click on "BUY" or "SELL" you have to decide not only the stop loss and target (as you can see in the chart above) but also the maximum loss you are willing to suffer, in the case your operation doesn't go as you have analysed.
This is a fundamental aspect because you must always to put yourself in the best condition to do trading and a loss never have to give you stress and cause problems to your account.
There are different ways to calculate the position size depending on the type of market. Following, you will see the calculation for the Forex market.
So, I will show you how to open a proper Forex position based on your risk appetite. In such a way, even though the currency pair reaches the stop loss, this will not create any problems for your account and stress for you.
I do that, by taking as an example the analysis above on EUR-USD. Let's say you buy the currency pair at 1.1730 with, as you have seen, the stop loss at 1.1560. Your maximum loss bearable is $ 200. How much do you have to invest in this trade? You obtain the position to open with this formula:
Position Size = / value 1 pip
Where: MAX LOSS is your maximum bearable loss you ($ 200); PIPS OF STOP is the distance in pips between the entry price and the stop loss; VALUE OF 1 PIP is the minimum value of a pip for $ 1,000 of purchase/sale of EUR-USD.
For the last parameter, for calculating the value of 1 pip of a currency pair, I don't want to insert link to my or other websites. On Google, you can find several tools for getting this value.
Returning to the example, the position size to open is as follows:
Position Size = / 0.10 = $ 11,764
If you establish the maximum loss not with a fixed amount in dollars (or in your currency) but with a percentage, the formula varies as follows:
Position Size = / value 1 pip
Where CAPITAL is the amount of money in your trading account, and %OF MAX LOSS is the maximum percentage of your capital you are willing to lose in the trade.
If for example, you have a capital of $ 50,000 and your maximum loss is 0.75% of your capital. The position size to open is:
Position Size = / 0.10 = $ 22,058
This aspect of trading is as simple as little used and is the first step to become profitable. I hope this brief lesson help you to improve your trading.
Good summer everybody!!