Determining appropriate position size
When opening a trade, it is always important to consider two outcomes, a positive one and a negative one. A positive outcome would be a scenario where the trade goes in your favor, while a negative outcome would be the reverse.
As much as we would want to make a lot of profit in the shortest possible time, understanding that a negative outcome is also a possibility, is the first step to taking caution on our position size. Lets take a practical example with a trading account that has 1,000,000 Naira in deposit- and wants to open a trade with a stop loss of about 50 points.
The first step is to know what percentage of your capital you would like to risk. Lets assume you want to risk just 2% of your capital.
2% of 1 million Naira = 20,000 Naira
Hence, the appropriate position size should be 20,000 / 50 = 400 Naira
This means to achieve a risk exposure of 2% with 50 point stop loss, 400 Naira would be the suitable position size.
Of course this size can be adjusted to be bigger or smaller based on the percentage of capital that you would like to risk.