Trading Risk Management: An Overview of How We Decide Our Position Sizes

Risk management is an area of trading that is often overlooked by many new traders, this is especially true when it comes to position sizing. We receive many emails from traders complaining about their trading performance, which allows us to find the root cause of many problems. One of the main causes is the lack of risk management.

By finding the right position size for a trade, you can maximise your profit in good situations, while minimising your potential losses in risky situations.

Broadly speaking, there are two main approaches to position sizing that most traders use: static and dynamic position sizing. We don’t encourage the use of static position sizing, as I will explain.

Static Position Sizes

There are a number of different ways that traders use static position sizes and each of them is an inappropriate method.

The first method is when a trader uses a standard position size for every opportunity. This means the size of the trade is only linked to the size of the account, rather than the opportunity itself.

For example, if a trader opens one lot for every $10,000 in their account. This means if they have a $10,000 account they will open one lot and if they have a $30,000…