Why You Should Percent-Risk Based Position Sizing
Percent-risk based position sizing is the ideal way to size your positions in the market because it naturally scales your risk up and down based on your actual account balance. When compared to fixed lot position sizing, this method of calculating forex lot sizes ensures that you’re never over-risking the capital in your personal trading account or prop-firm account.
Traders that utilize percent-risk based position sizing also ensure that they have a lower risk-of-ruin (also known as total loss risk), because as you go into drawdown in an account, risk naturally scales down. Conversely, if you are up on the account, you’ll continue to risk a fixed percent (usually 0.5%-1% risk per trade) of the total account balance enabling you to take advantage of compounding returns in your account. This is especially prevalent if you’re able to produce consistent returns month-to-month.
Another way to think about it is that you’ll see exponential gains versus linear gains in your account as you consistently produce profits in your trading accounts. This simple concept applies both to forex trading accounts as well as long term investing, as it lets you grow your account by taking advantage of compounding gains. If you want to see how your account grows over time and find out your monthly interest earnings based on specified starting balance, monthly percent gain, and number of months, using a forex compounding calculator is a great way to achieve this.
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