How to calculate a trading lot manually
Good day, comrades forex traders! Today we’ll talk about how to calculate risks when trading Forex.
As you might have guessed, risk management (or risk management) is one of the key conditions for effective work in the Forex currency market, and without it, you can quickly lose all the funds in your trading account. The main topic that we will touch upon in the lesson is the ratio of the size of the deposit with the acceptable risk values, and we will also learn how to calculate the size of the trading lot manually. After all, all kinds of auxiliary indicators are good, but you should not forget the math)
So, let's start with the basics.
1. Recommended risk per transaction should not exceed 3% of the deposit amount. In addition, the allowable risk should be fixed within your trading strategy. If your trading system fails you, you can save the necessary amount of funds on deposit, so that later, by revising the trading system, significantly increase it.
Let's say that the amount of risk with a deposit of $ 100 and the risk of a deal of 3% is $ 3, and with a deposit of $ 1000, respectively, it will be $ 30 and, say, with a deposit of $ 7000, the recommended risk is 210 dollars.
|Deposit||Risk per trade (3%)|
2. The recommended ratio between Take Profit and Stop Loss should be at least 2 to 1, and at the same time you can take a larger ratio, and less is strongly not recommended.
3. Also, it is very important (and in the future we will return to this) to determine the cost of 1 point, that is, the cost of the minimum price change:
|Lot||The cost of 1 point|
The cost of one point is not always equal to $ 1 (with lot 0.1). Depending on the currency pair, the price may differ from the indicated. However, in most cases, the cost is close to $ 1, so we can round it to $ 1 to simplify. If necessary, you can find out the exact value of an item for a specific pair using the lot calculator.
For example, in the case of the pair USD / RUB and dollar as the deposit currency, we buy dollars for rubles, respectively, we need to convert the ruble points into dollars. When buying 10,000 currency units (0.1 lots), the calculation will look like this: margin * point size * RUBUSD rate = 10000 * 0.01 * 0.016 = 1.6 $
And now, having learned the basics of risk management, we can directly calculate the risk itself:
Let's say we buy AUDUSD at the price of 0.7674 and set the stop loss at 0.7644.
- So, the deposit with us is $ 1,500, and the acceptable risk per trade = $ 45, that is, 3%, as you remember;
- Our stop loss amounted to 30 points, since we entered at 0.7674, and the stop loss set at 0.7644. That is, if we subtract 0.7644 from 0.7674, then we get 30 points;
- Our maximum lot was 0.15 ... How did we calculate such a trading volume?
- We look ... our minimum trading volume (lot) is 0.01 lots, respectively, the cost of a point is $ 0.1;
- We will calculate the stop loss in dollar terms as follows: we multiply the stop loss in points, that is, 30 points, by the cost of the minimum price change, which is $ 0.1 for us. 30*0,1… It turns out $3. It turns out that the minimum possible risk per trade is $ 3;
- So, we remember that our acceptable risk per trade is $ 45, and the minimum volume for risk is $ 3, which means that the maximum trading volume corresponding to the maximum risk per transaction is considered as follows: 45/3 = 15, then there we divide the amount of acceptable risk by the minimum amount in dollar terms. It turns out that we can exceed the minimum risk per transaction by 15 times, which, in turn, corresponds to 0,15 lots - this is our maximum allowable volume for trade. In other words, with a deposit of $ 1,500 and an acceptable risk of 3% of the deposit, we should open positions in 0.15 lots;
- In other words, we get the following simple formula for calculating risk: Lot size = max. risk (in $) / stop loss (in points) / minimum value of 1 point * minimum trading lot
|Stop loss||30 pips|
Risk Calculation Examples
Well, we have learned how to calculate risks. But let's fix the acquired skills on a couple more examples.
- So, let's say that our deposit is $ 300, which means that we have an acceptable risk of $ 9. That is 3% of $ 300 $;
- Stop loss, say, $ 50 points;
- We recall how we calculate the lot size: $ 9, that is, max. risk, we divide by 50, that is, by the size of the stop, divide by the minimum cost of one point, which, as we recall, is $ 0.1, and multiply by the minimum lot, which is 0.01. (9/50 / 0.1 * 0.01). And in the end, our lot size was 0.02.
It remains only to sell, for example, EURUSD. We open a sell order with a size of 0.02 lots and set a stop loss at a distance of 50 points.
|Stop loss||50 points|
Let's look at another example, but take an even lower acceptable risk, say 2.7%.
- Our deposit will be, and why not, $ 8500;
- So the maximum risk will be $ 229.5;
- Stop loss arbitrarily take equal to 25 points. We place an order on 1.11128 and add a stop loss;
- We consider, substituting the values in our formula: 229.5 / 25 / 0.1 * 0.01 = 0.918, which is the lot size for our current risk.
|Stop loss||25 points|
In the end, I would like to add some useful recommendations that will help you more effectively configure your risk management system:
- In order not to increase the risks, we advise you to round the calculated lot size down. That is, returning to the last example, we recall that our lot size was 0.918, which means we round it to 0.91;
- We also advise you to test your strategy on history and determine the average stop loss value, which saves you from having to substitute new and new values every time. Having calculated your average stop loss, you only need to substitute the size of the deposit and the value of the allowable risk in the formula, while the stop loss, the minimum cost of one point and the minimum lot will already be known;
- In addition, it is very important to consider the spread when determining the size of stop loss. For example, if your stop loss is 30 points, and the spread = 2, then the calculated stop loss value will be 32 points;
- And finally, do not take risks in excess of your own established norms within your trading strategy. Never, even with one hundred percent confidence in controlling the situation. By limiting your intemperance in the short run, you reap the benefits in the long run!
- Also, if you do not want to calculate the risks manually, we recommend that you use a convenient calculator to calculate the trading lot.
Thank you and see you soon, friends!