How to Determine Position Size When Forex Trading

For a foreign exchange (forex) trader, the trade size or position size decides the profit he makes more than the exit and entry points while day trading forex. Even if the trader has the best strategy for forex trading, he is taking too little risk or too much risk if the trade size is very small or very large. Traders should avoid taking too much risk since they will lose all their money. Some tips on how the trader should Determine Position Size are provided.

A micro-lot consists of 1000 units of currency, a mini-lot 10.000 units and a standard lot has 100,000 units. The position size of a trader depends on the size and type of lots that are bought or sold while trading. The risk of the forex trader can be divided into account risk and trade risk. All these factors are considered to determine, the right position size, irrespective of the market conditions, trading strategy or setup.

Risk limit for each trade

Most traders consider specifying the dollar amount or percentage limit risked on each trade as the most crucial step in determining the size of the forex position. Usually, professional and experienced traders will risk a maximum of 1% of their account in trade, usually, the amount is lower. While the other variables for trading may change depending on the trade, most traders will keep the percentage they risk on the trade constantly, though the amount risked for the trade may be reduced if it exceeds the 1 percent limit.
(Max risk per trade position should be 1%-2%)

Pip risk

A pip is an abbreviation for price interest point or the percentage in point, is the lowest unit for which the currency price will change. When currency pairs are considered, the pip is 0.0001 or one-hundredth of a percent. However, if the currency pair includes the Japanese yen, the pip is one percentage point or 0.01. Prices with an additional decimal place are shown by some brokers and this fifth decimal place is called a pipette. In the case of the Japanese yen, the third place is the pipette. m The Pip risk for each trade is calculated as the difference between the point where the stop-loss order is placed and the entry point.

A stop-loss will close a trade when it is losing a specified amount. This is used by traders to ensure that their loss does not exceed the loss risk for the account. The stop-loss level also depends on the pip risk for a specific trade. The volatility and strategy are some factors that determine pip risk. Though traders would like to ensure that their stop loss is as close to the entry point as possible, keeping it too close may end the trade before the expected forex rate movement occurs.

Pip value

In a currency pair that is being traded the second currency is called the quote currency. If the trading account is funded with the quote currency, the pip values for various lot sizes are fixed at 0.0001 of the lot size. Usually, the forex trading account is funded in US dollars. So if the quote currency is not the dollar, the pip value will be multiplied by the exchange rate for the quote currency against the US dollar.

What information do we need to make forex position size calculator formula?
Account Currency: USD
Account Balance: $5000 for example
Risk Percentage: 1% for example
Stop loss: 200 pips for example
Currency: EURUSD

Step 1: Calculate risk in dollars
Calculate Risk percentage from account balance: 1% for $5000 is : $5000/100=$50.
$50 is 1% from $5000.

Step 2: Calculate dollars per pip

(USD 50)/(200 pips) = USD 0.25/pip

Step 3: Calculate number of units
USD 0.25 per pip * [(10k units of EUR/USD)/(USD 1 per pip)] = 2,500 units of EUR/USD

2.5 micro lots or 0.25 mini lots is the final answer.

On the end here you can use Position Size Calculator below:

The risk you can define either using % or either using risk in dollars.

Best Forex Trading Hours

The spread in the foreign exchange (forex) market and the profit which a forex trader makes depends to some extent on the time when he chooses to trade. Hence forex traders, especially those who are new to forex trading would like to find out the Best Forex Trading Hours. Experts claim that the optimal time for trading forex is when the market activity is highest, since the difference between the bid and ask prices, the trading spreads will reduce to the lowest level. During this period, the forex brokers, market makers make less money, and the forex traders can make a greater profit for themselves. But is this true only in theory?

Largest forex exchanges.

The largest forex exchanges in the world are Tokyo, London, Sydney, and New York exchange. It is important for Forex traders to remember when the working hours of these exchanges and when more than one exchange is open. If the timings of the multiple exchanges are open, the trading volume increases, adding to the volatility, the rate of increase of the currency prices. Forex traders can benefit from these factors. Though investors usually do not like volatile markets, in forex, high volatility results in more opportunities to make a profit

Forex Markets timings worldwide

There are 15 independent exchanges worldwide which are open every week from Monday till Friday. The traders hours for each exchange are different, yet for most forex traders, the important timings in Eastern Standard Time are listed below (forex market session times):

Tokyo: 7 pm to 4 am

Sydney: 5 pm to 2 am

London 3 am to 12 pm – noon

New York: 8 am to 5 pm

What time London forex market open? As we can see it is 7:00 GMT (3:00 AM EST). Below is Table with all details.

Though each exchange is independent, the same currencies are traded on all the exchanges. Hence when two or more exchanges are open, there is a major increase in the volume of the purchase and sale of currencies by traders active on these exchanges. The bid and ask rates for currencies in one forex exchange will affect the rates in all other exchanges which are open, making the market more volatile and decreasing the spread. The windows for the major exchanges are

3 am to 4 am when the London, Tokyo exchanges are open

7 pm to 2 am when Sydney, Tokyo forex exchanges are both open

8 am to noon, when London, New York exchanges are open

See major forex market hours – forex trading session times Table:

Best Times for trading in Forex

For most forex traders, the best time to trade is the four hour period when both the London and New York exchanges are open from 8 am till 12 noon (EST). More than half the forex trades take place at these exchanges. On the other hand, from 5 pm to 6 pm (EST), most of the trading takes place at the Sydney, Singapore exchanges which have a far lower trading volume. The expected trading volume assumes that there will be no news affecting the forex market. If there is a military or political crisis, there may be an increase in trading volume, volatility even during the timings when the market is usually slow, so forex traders can make a profit.

Many traders who are new to foreign exchange (forex) trading spend a lot of time researching. Unlike the stock markets which are open only during business hours, the forex market is open all the time, so many first time traders will work long hours, However, this can use up the trader’s savings, and also leave the trader mentally drained. Hence the trader should understand the timings of the forex markets worldwide, activity and plan their schedule accordingly so that they can get the best results working reasonable hours. The Best Times to Trade the Forex Markets are discussed below.

Unlike stock markets, the forex market worldwide is linked and is open from Sunday 5 pm EST to Friday at 5 pm. If two or more of the four major forex markets are open, the trading volumes will increase, and the currency pairs are more likely to fluctuate. If only one market is open the spread for the currency pairs is limited to 30 pips. However, when two or markets are open, the forex spread may be more than 70 pips, especially when major news related to the economy is released.

Research about Best Times for trading forex by Dailyfx.com
Experts from Dailyfx.com have analyzed over twelve million trades conducted by a large foreign exchange(forex) trader to find trends. It was noticed that the profit or loss of these traders depended to a large extent on the time of the day. Most of these traders are called Range traders since their profit depends on market conditions to a large extent. The strategies for range trading involve buying low and selling high. Many traders make a loss because they are choosing the wrong time for trading. Hence many traders would like to find out When is the Best Time of Day to Trade Forex? so that they can plan their schedule accordingly and make a profit.

Thousands of forex trades were analyzed to find trends in profits of the forex traders for five of the most popular currency pairs. While there are some daily fluctuations are observed, it is found that the trends are fairly stable. It is found that the traders are most likely to make a profit when forex/currency rates are less volatile. This is usually during the Asian, late US or early European forex market trading sessions. While the range trading strategy is effective when the forex rate fluctuates less, the trader will make a loss if there is more volatility.

The Best forex session to trade

After a lot of research, experts have noticed that for making a profit, European currencies should be traded during the period when major markets are closed, using a strategy for range trading. This corresponds to trading between 7 pm to 11 am UK Time. Hence the trade filters should be set accordingly. The same strategy is not effective when the Euro currencies are volatile during peak trading hours. Making a profit Range trading in Asia-Pacific currencies is more difficult since the periods when currency rates are highly volatile and less volatile are less clearly defined compared to European currencies.

The best arbitrage opportunity is evidenced on Fridays (learn more about arbitrage in our article)when selling USD and buying EUR at 00:00 and selling EUR and buying USD at 03:00 the same day.

Overlaps in timings for forex markets

Since the price range in forex markets is higher when more than one market is open, there are more opportunities.

What time is the forex market most active?

The most active trading hours are from  8 a.m. EST to noon EST time when both the New York and London forex markets are open  70% of the forex trades, especially in the US dollar, the euro takes place during this period, and traders can take advantage of the volatility to make a profit. The Sydney and Tokyo forex markets, London and Tokyo market timings also overlap for two and one hours respectively. However, the trading volumes in forex are lower, since these are smaller markets, and the overlap duration is also smaller.

How news affects the forex market

Major news can increase the trade volumes during a period when few traders are active. If the news is drastically different from what was predicted, the currency value can fluctuate greatly in a few seconds. New economy-related information affects currency rates worldwide, however, only a few types of news are relevant for forex traders. This news is interest rate related policy decisions, trade deficits, consumer consumption and confidence, CPI data, meetings of the central bank, GDP data, Unemployment rates, and retail trade-related information.

Conclusion

Forex traders should consider the overlap in market timings, economic news while deciding their trading schedule so that they have enough time to rest and other activities. Reading science research papers about this topic, there is no 100% rule about the best trading time for the forex market but based on Dailyfx research, the most profitable hours are low volatility hours.