Forex trading can be a lucrative venture, but it’s important to remember that, like any other type of investment, there is risk involved. One of the most important aspects of Forex trading is position sizing – or how much money you are risking on each trade.
If you don’t determine your position size correctly, you could end up losing more money than you intended. A position size calculator is a tool that lets you calculate the size of the position in units and lots to manage your risks accurately. In this blog post, we will discuss how to determine your position size when Forex trading.
What determines the size position?
The size of your position is determined by the number of lots and the sort and size of the lot you buy or sell in a trade:
- 1,000 units of currency are referred to as a micro lot.
- A lot of 10,000 units is a micro lot.
- A standard lot is 100,000 units.
Your risk is divided into two sections—trade risk and account risk. By considering all these elements, you’ll be able to find the perfect position size for any market conditions, trade setup, or strategy.
Calculate your risk tolerance
When determining your position size, the first thing you need to do is calculate your risk tolerance. Risk tolerance is the amount of money you are willing to lose on each trade. To calculate your risk tolerance, you need to consider your account size and stop loss.
Your account size is the amount of money you have in your Forex trading account. Your stop loss is the point at which you will exit a trade if it goes against you.
To determine your risk tolerance, simply divide your account size by your stop loss. For example, if you have a $1000 account and are willing to lose $100 on each trade, your risk tolerance would be 1000/100 = $1000 per lot traded.
You may also use a set dollar amount, which should be equal to or less than 1% of the value of your account. You could potentially risk $75 per trade. As long as your account balance is over $7,500, you’ll only be risking 1% or less of it.
Although other trading conditions might fluctuate, account risk should remain consistent. Don’t gamble your entire account on one trade, 1% on the next, and 3% on the third. Pick a dollar amount or percentage, and stick to it—unless you get to the point where your chosen dollar amount is more than 1% of the total.
Prepare for the Risk of Pip on a Trade
The risk you take with each trade is determined by the difference between your entry point and stop-loss order. A pip, which is a small portion of a currency’s price that varies, is referred to as the “principle point” or “interest point.”
For most currency pairs, a pip is 0.0001, or one-hundredth of a percent. For currency pairs that include the Japanese yen (JPY), a pip is 0.01, or 1 percentage point. Some brokers select to show prices with an additional decimal place. The fifth (or third, for the yen) decimal place is called a pipette.
A stop-loss order terminates a trade if it loses a certain amount of money. Risk tolerance is the amount of money you’re willing to lose before cutting your losses. Its purpose is to guarantee that your loss does not exceed the account’s risk limit and relies on the trade’s pip risk. Let’s say, for example, you buy a EUR/USD pair at $1.2151 and set a stop-loss at $1.2141–you would then be risking ten pips.
The amount of risk associated with trade is based on volatility or a strategy. For example, a trade may have five pips of risk one day and 15 pips of risk the next.
Knowing the pip value for a trade
The value of a pip is different for each currency pair and depends on the currency’s exchange rate. A standard lot is 100,000 units, so for most pairs, each pip will be worth about $100 (EUR/USD).
When trading a mini lot (one-tenth of a standard lot), each pip will be worth $1000 x 0.0001 = $0.1000 per pip. For JPY-denominated currency pairs, one pip is equal to 0.01 since these are yen-based crosses; therefore, each pip would have a value of 1000 x 0.01 = ¥1000 per pip.
Determine the Size of a Trade’s Position
It’s now time to determine how many units or lots you’ll trade. You can use the following equation:
(Trade Risk ÷ Account Risk) x Account Size in Standard Lots = Position Size in Standard Lots
For example, let’s say you want to buy EUR/USD and place a stop-loss order 20 pips below your entry point. If you have a $5000 account and are willing to risk $250 per trade, your position size would be calculated as follows:
$250 (trade risk) ÷ ($5000 x 0.02 (account risk)) x 0.01 (account size in standard lots) = 0.25 (position size in standard lots)
You would then buy 250,000 units (0.25 x 100,000) of EUR/USD.
If you were trading a mini lot, each pip would be worth $0.1000, so your position size would be 25,000 units (250,000 x 0.01). In this case, you would buy 25 mini lots or two-and-a-half standard lots.
Related: Best Forex Trading Apps
Final thoughts:
Now that you know how to determine your risk tolerance and position size for each trade, you’re ready to start forex trading! Just remember always to use stop-loss orders and never risk more than you’re comfortable with losing.
