CHAPTER 5 - LESSON 3
Position sizing and money management are key components of risk management.
Position sizing refers to the amount of currency a trader will buy or sell in a trade. Money management refers to the overall management of an investor’s trading capital.
Here are some key things to know about position sizing and money management:
Refers to the amount of currency a trader buys or sells in a trade.
• Traders should use position sizing to limit their potential losses on a trade, and should aim to risk no more than 1-2% of their trading capital on any single trade.
Allows a trader to control larger position exposure with a smaller amount of capital. While leverage can increase potential profits, it also increases potential losses.
• Traders should use leverage carefully and responsibly.
Refers to the overall management of a trader's trading capital.
• Traders should set a maximum amount of capital they are willing to risk, and should only risk a small percentage of their trading capital on any single trade.
Involves spreading trading capital across multiple trades and currency pairs.
• Diversification can help to reduce risk and to smooth out returns over time.
To sum up, investors should use position sizing and money management to limit their potential losses and to protect their trading capital. By limiting the amount of capital risked on any single trade and by diversifying across multiple trades and currency pairs, traders can reduce their overall risk exposure.
In the next section, we will explore additional risk management strategies to empower you for trading success.
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