Jul 14 2021 0

Should we trade smaller positions to reduce the risk of forex trading? Related to a reasonable position size is the experience of splitting positions rather than taking the entire position at once for each trade. This is a good method to spread and control risks in forex trading.

What is “position” in forex trading?

forex position

A position in forex is the amount of a currency owned by an individual or institution, who can then trade based on the movements of this currency against other currencies. Forex positions have three characteristics:

  • Base currency pair
  • Trend (buy or sell)
  • Lot size

Traders can take positions in different currency pairs. If they expect the price of the currency to appreciate, they can Buy. The size of the position they take will depend on their account equity and margin requirements. It is important for traders to use the appropriate amount of leverage.

BUY position and SELL position

Having a long and short position in forex means betting on a currency pair waiting for it to rise or fall in value. Long and short positions are the most important aspect of entering the market. When a trader buys, they have a positive investment balance in an asset, in the hope that the asset will increase in price. When he sells, he or she will have a negative investment balance, hoping the asset will drop in price so that it can be bought back at a lower price in the future.

buy and sell position

Trading small positions

Trading smaller positions is entering a position many times smaller over the entire size of the position (full-size trade). Split positions can be executed at the same time and at the same price, just like the whole position, but the profit of each smaller position is different. Each smaller position can be closed to protect profits as the price continues to move in a profitable direction.

For example, instead of buying the entire capital in a single trade for a stock at a certain price, split the position so that you buy only 1/3 of the capital at a time, and possibly each purchase at the same price. The first stop loss for all three positions above can be placed the same as the entire position. If the price moves in a profitable direction, one of the above positions can be closed at a certain price (determined by technical analysis) while the other two positions remain open.

trade small positions

At this point, the first stop loss for the other two positions can move to breakeven. If the price continues to move in a profitable direction, another position can be closed with a greater profit than the first position, and again the take profit price is determined by technical analysis. The dynamic stop loss for the last position (currently at breakeven) continues to be moved to protect the newly acquired profit. Finally, if the price continues to move in a profitable direction, the third position can be closed for final profit at the price determined by technical analysis, or a stop-loss order can be placed. The position can continue to move until it is taken by market price action and the position is closed with some profit.

The split position method combines two different methods – protecting profits while maintaining positions to generate profits. At any price after the first position is profitable, the trader can apply this method to ensure that the above profit is not lost, while the remaining positions are protected from losses by dynamic stop loss order. Since no trader can know how far the price will rise, this method helps to manage profitable situations in a prudent and efficient manner.

author

Fanara Filippo

Hey, I’m Fanara Filippo. I’m the founder of this site. I'm currently living in Bangkok, Thailand. I have been trading forex for more than 5 years. You can read my articles about the best forex brokers on this page. Let’s review brokers today.


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