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.
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