Don't want to take any unnecessary risks? Adjust the position size

In the hunt for profits, traders often open too large positions, hoping to make a lot of money in a short period of time. When they don't want to break the risk management rules, they set an unnecessarily narrow stop loss, which can cause even a good trade to end in a loss. At the same time, opening a smaller position would have been enough.

It is quite common for traders trying to meet the FTMO Challenge and Verification conditions to open unnecessarily large positions to meet the FTMO Account requirements. They are then at risk of a big loss, from which the trader may take a long time to recover.

Don't take unnecessary risks

In our recent article, we wrote that risking too large a percentage of your account on a single trade idea is not worthwhile and that we do not recommend such behaviour to our traders.

The problem arises when traders want to open these large positions and at the same time would like to follow the risk management rules and not risk too large amount of funds per trade. This is because many of them then set too tight a Stop Loss, which unfortunately increases the likelihood that even a relatively small price movement in the wrong direction leads to a loss.

Smaller positions, better chances of success

The solution is simple, and besides better results, it can also have a positive effect on the trader's psychology. Some traders resist reducing positions because they feel that smaller positions cannot guarantee them large enough profits. It is true that when a trader hits a big move, he is able to make big money in a few minutes, but this is more like betting on chance and gambling.

Some traders then have a high RRR strategy, which allows even a small number of profitable trades to lead to long-term profits, but they are forced to endure quite a lot of losing trades, which not everyone can bear mentally.

A smaller position does not necessarily mean that a trader will trade with a low RRR of 1:1; moreover, it can be much more comfortable for many traders regarding their mental well-being.

We can also illustrate this with an example. In the picture below, we see a situation where a trader was entering a long position on a double-low formation. He entered immediately after the previous high was broken (green line), and the price was corrected immediately after the entry. If the trader had set a stop loss below the last red candle, which is about 30 pips (light red line), the price would have kicked him out of the trade after a few minutes. If he wanted to risk $1,000 on this trade (at an account size of $100,000, this is 1%), his position size on the USDJPY pair would be 5.14 lots.

But if he had reduced his position to 3.85 lots and set the SL below the green candle (dark red line), he would have had a margin for error of up to 40 points and would not have ended up in a loss. If he had been even more conservative, he could have set the SL at 50 points and his position would have been only 3.09 lots.

Given the subsequent upward movement, ideally with the SL at 40 points, he would have made over $4,000 (RRR 4:1) because the upward movement was over 160 points. Even if the SL was 50 points, he could have made $3,000, which is certainly not bad.

Making long term money in forex doesn't mean making a lot of money on every trade at any cost. A serious approach to risk management and smaller positions does not have to mean worse results in the long run, quite the opposite. Keep this in mind the next time you enter your trade and think about the size of your position. There is no need to open a large position at any cost, which can lead to unnecessary stress. Trade safely!