Position Sizing with Fixed Risk Percentage.

Hi,

I risk 3% of my Account Balance on all trades, and calculate my position size with the stop loss.

But it seems there's a problem with that.

For example, lets say I have a trade with a wide stop of 100 pips. At 3% Risk, the position size is 0.3. This trade makes 150 pips, making a profit of up in $450. Good.

Now I have another trade that has a stop of 30 pips. At 3% Risk, the position size is 1 lot. This trade hits the stop loss, losing $300.

150 pip gain is almost undone with a 30 pip loss. I see that very often.

Does any one see a problem with this approach? Is it wrong to calculate position size with fixed % risk and stop loss? How do you guys handle this problem?

Thanks,
JForex.

Hi JForex,

you have to trake into account the volatilaty of the pair at the time of trading. You can add an indicator to your chart which shows the Average True Range. typically, chosing a SL of 2 or 3 times the Average True Range (ATR) is fairly common. So if you risk 3% of your equity, then multiply your equity with 0.03 and divide the result by 2 or 3 times the ATR times 10$. Example: your equity is 10,000$ so you are willing to risk 3% being 300$. If the ATR on the pair in case is 10 then divide 300$ by 2-3 times 10 times 10$. So say you want to play safer and go for 3 ATR, then the equation is:

position size = (10,000*0.03)/(3*10*10) = 1 lot.

Please note than if the ATR would be higher than 10 at the time you want to put in the position, you would break your rule of risking max 3% of your equity if you put in 1 lot. So then reduce the lot size or do not trade.

So I think the short of it is: look at the ATR!

Hope this helps..

Ijebidiw