What is Position Sizing?
Position sizing refers to how much risk you are willing to take on each trade. It is not simply about deciding “how many lots to trade,” but rather defining in advance how much capital you are prepared to lose if the trade hits your stop loss.
📈In practice, professional traders typically risk 1% to 2% of their account on each trade. Position size is not fixed; it is dynamically adjusted based on the distance of the stop loss. The wider the stop loss, the smaller the position size; the tighter the stop loss, the larger the position size can be.
✨When market volatility increases, after a series of losing trades, or during periods of high uncertainty such as major economic data releases, traders should actively reduce their position size. The purpose of doing so is to control drawdowns and avoid excessive damage to the account during unfavorable conditions.
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