Hi Lydia, do you scale your lot size according to your stop loss and % risk that you are taking? Or do you just use a fixed lot size for every trade, regardless of the # of pips of your stop loss? I have a problem with position sizing, and I tend to end up trading with a bigger lot size in my losing trades, and smaller lot size in my winning trades, whether I scale my lot size according to my stop loss, or have a fixed lot size for every trade. Thanks.
Anonymous
This is a great question and is something most traders, I think, struggle with. I know I do. Often it is when I am rushing into a trade or feeling too greedy. My solution is this:
I use a fixed number of lots of the same size based on the percentage of risk I am taking. That percentage is based on my ‘margin used’ so it is largely dependent on the account and lot size. I determine my risk by the margin because once you exceed a certain margin threshold, your risk is hugely out of your favor. Especially as that position moves against you. And this margin is the sum of all trades not just the ones on a certain pair. So I find that no more than 3-5 lots per pair works for my risk tolerance since I only trade 1-3 currency pairs at any given time. More than that and I find that my margin becomes too high and my trading is now too risky (and, therefore, too emotional) regardless if it is a winner or loser. Not a great position at all. Find the risk tolerance using your ‘margin used’ as a guide.
If you have a bigger lot size on your losing trades, it sounds like averaging down and greed. If you have smaller lot size on your winning trades, it sounds like hesitation and fear. Try using a fixed number of lots of the same size and DO NOT EXCEED IT no matter how well the position is doing. This also brings another level of discipline to your trading.
Good luck!
