A beginner is quick to do the math…“If I” make $100 a day with one contract, I will make $2 million a year with 100 contracts!” He is too quick to think about trading big positions, and even when he starts out, trading what he thinks is a small position, he is usually trading too big. How can a beginner tell if his position size is too big? That’s easy. He just has to ask himself, “Did I manage all of my trades today as I should have, or did I have several trades where I exited too early because I was feeling nervous over how much I would lose if my stop got hit?” If he did not manage correctly, then he cared. He is trying to compete with computers who have no feelings and certainly do not care about anything.
My recommendation is that traders should trade their “I don’t care” size. Whatever a trader thinks it is, he should then trade 50 – 75% smaller so he really won’t care if the trade goes against him. Over time, he can handle larger positions while still not caring. If he increases too quickly, he can back off and try to increase again later. When I tell traders this, some get angry and quickly ask me how they can ever get rich trading so small. The answer is simple. Successful traders don’t constantly think about getting rich, although many end up that way.
Instead, they only think about doing the right thing all day long. That is the first goal. They know that if they do, they will make money, which is the second goal. Sometimes, they will make a lot of money, which is the third goal, but they never worry or think about that. Remember, most successful traders are not making $100 million dollars a year. However, many make far more than the richest doctors and lawyers, and that is plenty to have a great life.
There is one other point about position size. It should always be dictated by the number of ticks to your protective stop. If you normally trade $100,000 in a Forex trade and risk 20 pips, but you want to buy a strong breakout and the bottom of the breakout is 40 pips below the current price, you should trade half only a $50,000 position. Also, if you bought $50,000, and the breakout continued up for 40 more pips without a pullback, your stop is now 80 pips below the current price.
Remember, your entry price is irrelevant. All that matters is where your stop is. If you are now risking 80 pips and you normally risk only 20, you need to take profits so that you can reduce your position to 25% of your usual size. In this case, you would take profits on half of your position, leaving yourself with only a $25,000 position. If there is a pullback followed by a buy signal, and the stop for the new position is only 20 pips below, you can now have a $100,000 position, which means you can buy $75,000 more, and put the stop for the entire position at 1 pip below the new signal bar, 20 pips below this latest entry price.
Thank you for reading my How To Trade Price Action manual.
The next article is Learn to manage your trades.
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