Position size, level of risk
Imagine you put $1000 on your deposit and you want to trade. Should you use the entire sum at once? Probably not: remember how we spoke about risk management? So, which position size to choose then?
Step 1. Don’t risk more than 1-2% of your deposit for one trade. This way even if some of your trades aren’t successful, you won’t lose all your money and will be able to keep trading.
For example, if you deposit is $1,000, risk no more than $10 (1% of account) on a single trade.
Step 2. Establish where the stop loss will be for a particular trade. Then measure the distance in pips between it and your entry price. This is how many pips you have at risk. Based on this information, and the account risk limit from step 1, calculate the ideal position size.
For example, you want to buy EUR/USD at 1.1100 and place a stop loss at 1.1050. The risk on this trade is 50 pips, and you can risk $10.
Step 3. And now you determine position size based on account risk and trade risk. Remember that there are different lot sizes. A 1000 lot (micro) is worth $0.1 per pip movement, a 10,000 lot (mini) is worth $1, and a 100,000 lot (standard) is worth $10 per pip movement. This applies to all pairs where the USD is listed second, for example, the EUR/USD. If the USD is not listed second, then these pip values will vary slightly. Note that trading on a standard lot is recommended only for professional traders.
Use the formula: [Account risk/(trade risk x pip value)] = position size in lots.
Assuming the 50 pip stop in the EUR/USD, the position is: [$10/(50x$0.1)] = $10/$5 = 2 micro lots. The position size is in micro lots because the pip value used in the calculation was for a micro lot.
For the number of mini lots use $1 instead of $0.1 in the calculation, to get 1 mini lot [$10/(50x$1)] = $10/$50 = 0.2 mini lot.
The pips at risk will often vary from trade to trade, so your next trade may only have a 20 pip stop. Use the same formula: [$10/(20x$1)] = $10/$20 = 0.5 mini lots, or 5 micro lots.
This was the beginner’s guide to Forex trading. To learn more, check our next courses!
Other articles in this section
- Demo accounts
- Forex brokers
- MACD (Moving Average Convergence/Divergence)
- Margin, Leverage, Margin Call, Stop Out
- Swap and rollover
- Economic calendar
- How can I predict where exchange rates will go?
- When is Forex market open?
- Bid and Ask price. Spread
- Calculating profits
- What are pips and lots?
- How to trade?
- Currency pairs. Base and quote currencies. Majors and crosses
- What technical tools do I need for trading?
- What is Forex?