The size of your position is an integral part of your risk strategy in Japan. This article will discuss how to calculate the size of a trade and offer some general thoughts on why it is good to make sure that you do not become over-exposed to any one trade or opinion.

What market should you trade-in?

Now let’s consider what market you are trading in. A second-level foreign exchange trader for an international bank making markets in significant currencies will have very different ideas on position sizing than a beginning retail Forex trader with no prior financial markets knowledge or experience.

The FX trader would need to trade much larger positions at ten times the rate of the retail Forex trader due to the difference in liquidity available. Liquidity is the ability to quickly buy or sell any shares, currencies, commodities, etc., without affecting prices unduly.

Now it is time to work out the size of each position.

Now that we have an idea of what market you are trading in, it is time to work out the size of each position. The first step should determine how much money you are willing to risk on this trade. It can be done by calculating your ” maximum pain, “simply the amount you are prepared to lose on this one trade.

To do this, take the total amount of capital you have set aside for trading and multiply it by the level of confidence rating described above. I had $50 000 US Dollars allocated for trading Forex at a confidence level of 7.

My maximum pain would be $350 000 [$50k x 7]. It means that if I am wrong in my analysis, I can afford to lose no more than about a month’s salary. Your maximum pain should not be confused with the size of your position, which will come out at much lower numbers.

What is the size of your position?

Now that you have a number for how much to risk in any one trade, it is time to work out what this means. The next step is to calculate the amount of currency or shares in this market you are prepared to hold.

In our example from above, where we were risking $350 000 on Forex trades at a confidence level of 7, let’s say that our best-case scenario is that we are entirely correct and the market moves in our favor by 5%. At this point, we have made a five-times return on capital and can afford to hold ten times as much money – meaning we should risk $35 000 per trade (10 x $350 000). If the market continues to move in our favor, we can scale up accordingly.

The same calculation must be run for every position you take. It requires taking your total capital and calculating how many units of currency or shares you would like to own. When doing this calculation, remember that you want to leave room for all your trades reverting to breakeven; if they do not, it will reduce the number of units you can afford to own.

What is the overall size of my positions?

So now that they have two different numbers, what are they? The first number is how much you risk on each trade at a given level of confidence, and this must be calculated for each market you are trading in.

The second number is how many units of currency or shares you want to own at any one time under all scenarios. It may seem unclear now, but it makes sense when analyzing the markets.

For example, suppose I was trading US Dollars against the Japanese Yen through an international brokerage house offering high leverage (like 100x). In that case, I might only use 5% of my capital for each trade.

Is Forex trading something you would like to try, then sign up with a Forex broker that offers high leverage options to buy stocks here?