Position Sizing

Position Sizing


Hello, it’s Kei and I am an individual forex
trader based in Tokyo, Japan, and welcome back to my another video. This is the part 3 of money management and
in this video, I’ll be talking about the correct positioning and correct lot sizing
to trade as well as the position sizing on each trade, because this is one of the most
frequently asked questions, like “what is the correct position sizing?” or “what
risk should I take on each trade?” and on and on. And to be honest, it depends on where you
enter, and it also depends on how much you have, and I will be talking about the golden
rules that I apply in my daily tradings, and no matter how much you have, this is something
that you can still apply to your daily trades. So if you like this topic, please press a
good button and make sure to subscribe and hit a bell so that you get notifications for
my future forex educational videos and live streamings. So, let’s begin. Let me ask you a question. Are you trading with the correct position
sizing? How you determine the position sizing on each
trade? For example, when someone says “I bought
GBPUSD with 0.1 lot.” And I ask “alright, so why you placed 0.1
lot?” Then he goes “I placed relatively smaller
lot because that way I can avoid the risk.” And to me, it’s not how you avoid the risk
because it’s not logical enough. So here is the logic I use. Let’s say when there’s a market like this. This is from the actual chart. It’s USDJPY in H1 timeframe and I am actually
selling on this pair right now, so let me explain this from my real trade, alright? So, first of all, when you look at the market,
is it in a trend? or in a range consolidation? Just by looking at this chart, which one is
it? trend? or consolidation? Well, to me, this is in a range, you can draw
resistance here, and support here. Also you can draw a line here also. So, first thing you want to recognize is that
this is in a range market, you know, the candles are interacting with Kumo, and the price are
resisted and supported by Bollinger bands upper side and lower side of deviations, and
MA is going up and down. So you can see that basically, the price keeps
bouncing up and down within the range, and that’s one thing you can instantly recognize
when you see this chart. So most likely, when the price touches the
upper line, then there will be a chance that the price will be resisted next time again,
and comes back down. And when you actually look at the Daily timeframe,
there’s a resistance here also in this July around this price level. And that’s why I placed sell here yesterday,
and still holding it as of October 25th, which is the day that I’m recording this video
right now. So, the next question is, what position size
should I go for? Let me tell you how. First of all, it depends how much of risk
you want to take for this particular trade. Let’s say you have $1,000 capital and trading
this pair, and let’s say you want the risk on this trade to be 2%. Well, how you come up with 2% is, when you
see this chart pattern and based on your knowledge and past experience, if you think the price
will most likely drop from this price level, you can go aggressive, like taking 5% risk
and go short, but if you think there’s a resistance here but still think that there
is a possibility of breaking it upwards, then you need to cut the risk to 2% or even 1%
because you also expect the price to go upwards. Well, to me, I think from this momentum and
from this chart pattern, there’s a possibility of the price to break the line upwards, so
the risk I’m taking is very low on this trade. So anyways, here is the rule 1st, determine
how much of risk you want to take on that trade depending on the strategy you are using. When it’s your favorable chart pattern or
signals, then you can go for up to like 5%, but if you are not confident enough, you drop
the risk as low as like 1% or 2%, alright? And this should based on your chart reading
techniques. So again, as I look at the chart and I think
it’s a right timing for sell, but in this case, I still think the price to be breaking
the line upwards as well, you know, it’s also in my expectation as far as I look at
this market environment. So, let’s say I decide to take only 1% risk
on this trade, alright? Now the next question is, how do I determine
the lot sizing? Do I go for 0.1 lot? or 0.05 lot? or like
1 lot? Well, it depends on where you place the stop
loss and it should be also done by the chart reading technique. This is also a very important step because
if you cannot read the chart and spot the right place for your stop loss, then you cannot
come up with the correct lot sizing. In this case, I placed the stop loss here
and there are several reasons why it’s at this level. First of all, like I said there’s a resistance
line here, right, so when the price touches at this level next time, there’s a chance
that the price will be resisted at this level and comes back down again, and keeps going
downwards. The second reason is that if you look at this
wick pointing upwards, you can see that the resistance at the recent high is pretty strong,
and not only it’s got the wick, from this candle, the I wave broke the recent low downwards,
you see? And this is another proof from the chart,
that the resistance here is quite strong because it broke the recent low downwards. And that’s the second reason why I think
the price will be resisted when it touches this upper line. Also, if you look in the past, there were
several rejections at these places, and this also makes me the price to be resisted at
this level next time. So, based on those three reasons, I placed
the stop loss slightly above the wick, because when the price breaks this resistance level
upwards, most likely, it can be a start of a bullish trend, you know, so that means even
when I lose this trade, it still teaches me and tells me it’s going to be a trend reverse,
and because I can get that message from the market, even if the goes up afterwards6, I
would think it’s a good loss, alright? So, I placed the stop loss here. And here is the third step how you come up
with the correct lot sizing. Once you decide where to place the stop loss,
then you measure the pips to the stop loss, you know, how many pips to the stop loss,
and when I do, I found it’s 10 pips here. 7
Now, you need to do some calculation. Let’s say you have $1,000 capital, and you
only want to take a risk of 2% on this trade, and you set 10 pips to the stop loss, you
know, that means you set the risk to be 10 pips on this particular trade. So, what is the lot sizing you need to go
for when your capital is $1,000? Let me explain step by step here politely,
ok? When you have $1,000 capital and if you want
to take a risk of 2% on this trade, then the risk of how much you are taking is going to
be $20, right? 2% of $1,000 is $20. Now, the next questions is, what is the lot
sizing for 10 pips by $20? When the market moves 10 pips and when you
lose $20 from that 10 pips, what the lot sizing is going to be on this USDJPY? To get this, you need to know the relationship
between lot size, pips, and the amount of money. For those who are new, just remember this
formula. When you have 1 lot, then you get $10 when
the market moves 1 pip. In other words, when you have a position size
of 1 lot, when the market moves 1 pip, then you get $10, alright? This is the basic formula. So what if you go for 0.1 lot and the market
moves 1 pip? How much of value would that be when you go
for 0.1 lot and the market moves 1 pip? It’s going to be a dollar, right? So, how about, when the market moves 10 pips
and when you get $20, how many lots would that be? Here I will just tell you the answer. It’s going to be 0.2 lot. If you go for 0.2 lot, then when the price
goes backwards to 10 pips, then you get $20 loss and it’s going to be 2% of your $1,000
capital. Do you understand? If you don’t understand this, watch this
part over and over again to fully understand this because this is very very important for
your risk management. I will put the formula on the description
below so you can apply it to yourself, alright? So, this is how you get the correct position
sizing. Again, if you have $1000 and if you want to
take 2% of risk on this particular trade, and when you find the stop loss to be 10 pips,
then the correct lot sizing for you is going to be 0.2 lot. However, if you think the market is going
down and if you are positive based on your knowledge and past experience, and when you
decide to take a risk of 5%, let’s say, then that means you take a risk of $50 on
this particular trade, and in that case, the correct lot sizing for that trade is going
to be 0.5 lot. Or if you only want to take a risk of 1%,
then it’s going to be 0.1 lot ok? So depending on the circumstance, your lot
sizing should be changed and this is exactly how I manage my positions on each trade. Like I said on my previous video, usually
I take 2% risk on each trade, and if you look at my positions in the past, you think they
are relatively big, right? like sometime I go for 5 lots or 10 lots,
or sometimes I even go for 50 lots. But now you know, that’s because I have
a big capital of over $100,000 each month, and also, this is more important but also,
the loss cut of my entries are very tight every time. Like I only look for where the loss cut can
be only 10 pips or 20 pips at most, but still expect high reward of more than 80 pips in
average. And that’s why I can go for big lot sizing
because still, my loss is going to be just like 2% of my capital in average on each trade. If you do the math, then you know reasonably
how small my each positions are. And it’s ok when I get loss as a result
because it always tells me there is a change in momentum on the market every time I get
loss cut, but the thing is, I manage the risk on each trade and by doing this, I grow my
account each month and be able to 9make my living like this. And this is the reason why money management
is so important because if you don’t know how to do all these, like how to come up with
the correct lot sizing on each trade depending on your capital, no matter how good the strategy
is, when you get loss, it’s going to be huge and you blow up your account 1 time. Remember, on my previous video on part 2,
I explained by the example of green balls and red balls right? If you haven’t watched it, the link is on
the upper right corner now or it will be on the description below, but even if your winning
rate is like 80%, when you get a loss without this money management strategy, your account
is going to be blown up easily because when you get loss, it’s going to be much bigger
than the total amount of the gain you have. So, at first, this might be a bit of pain
for you to calculate the lot sizing like this every time you take a position, but when you
are used to this, then you can just do it automatically in your head like you breathe
everyday, but it literally saves your life. So every time you look at a chart and every
time you imagine where to place buy or sell, always, you know, always decide where to place
stop loss first, then get that pips to the stop loss, and calculate the percentage risk
you are taking based on your capital, and do this over and over, and get used to it,
because you know what, this technique is truly much more important than all the technical
analysis or winning rate because if you are good at position sizing and risk management,
then even if your winning rate is like 30%, you can still grow your account. Actually there’s a statistic proof for that,
and I will show it to you some time. And of course, if you combine it with your
technical analysis, then you will not only be able to increase your winning rate and
max profit, but you can also secure and grow your capital in a long run. Alright, thank you for watching until the
end. If you liked today’s video, please press
a good button so that it keeps me going, and from the next video, like I announced earlier,
from the next video in November, I will be talking all about price actions, like candle
sticks and chart patterns of the market. There will be 8 videos total, you know we
have 4 Mondays and 4 Thursdays, so total 8 videos, I will be explaining all about the
price action trading strategies that I’m currently using. So if you don’t want to miss those videos,
and I do live streaming every Tuesday and Friday, so if you don’t want to miss those
lives, please make sure to subscribe and hit a bell so that you get notifications, alright? Again, thank you for watching till the end
and thank you for your support as always. I will see you on next one.Stay Gold, Matane

3 Comments

  • SEAV JEA

    October 29, 2019

    Thank you so much for your share i like your vdo clips.

    Reply
  • K70

    October 29, 2019

    Very good Video, thank you.

    Reply
  • Felino Co

    October 30, 2019

    Thank you!

    Reply

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