Position sizing is the manner in which you strategically choose the weight of your asset holding. Are you going to hold a lot of it or just a little? Are you going to trade 10 lots or just one lot of a given currency pair?

Position sizing is a form of risk management. So when we think about position sizing, we often view it as a defensive strategy, which it is.

But what many traders are not seeing is that it can also be an aggressive strategy. That’s why it’s so important. It’s also what many (or most) traders tend to miss.
How a losing trade resulted in two opposite outcomes

The Setup

Imagine two traders (trader A and trader B) each with a $100,000 trading account balance.

Now, imagine the following two trades occurred for each trader.

• Trade 1 has a 20-pip target and a 10-pip stop loss
• Trade 2 has a 20-pip target and a 30-pip stop loss

Difference in Strategy

Trader A decided to trade a standard lot ($100,000) for each trade.

Trader B, on the other hand, decided to base position size on 2% of the account, risking no more than $200 per trade.

This difference in strategy is what accounted for the huge difference in results.

Difference in Outcomes

The first trade made 20 pips. The second was a loser, stopped out at -30 pips.

Combined, both trades returned a cumulative -10 pips.

Yet, one trader finished with a loss while the other made a profit. How’d that happen?

Trader A, who traded a standard lot, made $200 in the first trade but lost -$300 in the second trade for a total of -$100. Here’s the math:

• $100,000 * 0.0020 = $200
• $100,000 * -0.0030 = – $300
• $200 – $300 = – $100

Trader B, who risked 2% based on the potential loss of being stopped out, finished the day with a $202 return. Here’s how it happened.

• If trader B didn’t want to lose more than 2% of $10k (which is $200), then trading $20 per pip (equal to 2 standard lots) would be the limit, as getting stopped out by 10 pips would be a loss of $200.
• So, with two standard lots, a 20 pip profit amounted to $400 return ($200,000 * 0.0020 = $400).
• For the second trade, trader B decided that a $200 risk would require six mini and six micro lots (equal to $66,000); a total of $198 risked.
• The second trade got stopped out for a market loss of -$198 as anticipated.
• The total return for both trades came out to $202 (400 – 198 = 202)

Let’s recap

The trade was a loser, returning -10 pips.
Trader A achieved a return of -$100.
Trader B generated a gain of $202.

The difference between the two had everything to do with position sizing based on the stop loss.

The takeaway

Position sizing is a critical part of your trading strategy. As you can see in the example above, position sizing is more than just a defensive strategy. It can be used to optimize a trade based on your own personal risk tolerance and loss limits.