As FX traders we are always trying to optimize our trading plan to improve overall profitability and consistency. We gain an edge when we put the odds in our favor by increasing our batting average (win loss %) and increasing our average pips on a winning trade while decreasing our average pips on a losing trade.
When we decide to place a trade, most traders have a risk and trade management strategy that includes an entry point; and a predetermined stop loss and exit strategy. Where I see the most traders struggle, is with picking the right pair based on relative strength and weakness (which I will discuss in a future article) and the proper position sizing for different currency pairs.
Position sizing is absolutely necessary to keep the your risk %/trade the same on each trade. Do you know why that is important? Because even though you are confident that your trade is a winner (or you wouldn’t have put it on) YOU have absolutely no idea whether that trade is a winner or loser. And why does that matter? Because when your trading one pair or multiple currency pairs at the same time, the price of the pair makes a difference makes a huge difference when you use the same lot size for all your trades.
For example, if you have a 1.0 lot size on a $1 pair like USD.CHF (.9995) and a 1.0 lot size of a $2 pair live GBP.NDZ (1.9421) and they both move 100 pips, you would have earned 1% in the USD.CHF and only .5% in the GBP.NZD. Said another way, if your risk % and stop loss % are the same, you have to adjust the position size so that you are not overweighting one pair vs. another. Failure to properly adjust your position size is one of most common ways traders can blow up their account.
We have simple calculator to use (babypips.com) that will make certain that your risk management strategy can be fully implemented before you make that trade.
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