How to calculate the lot size?

I’ve a question about money management; I don’t know how to calculate the lot size.

I have the capital, the risk percentage, the risk in money and the stop loss that I’m going to use, but I don’t know how to get the lot size and I need it to trade.

For example:

Capital: $1000

Risk percentage: 5%

Risk in Money: $50

Stop Loss: 30

And how do I get the lot size?

Could somebody help me?

Thanks in advanced.

Hi rdlrn19,

Risk/Stop = $50/30 = $1.67 (to 2 d.p.) per pip risk.

0.1 standard lots = $1 per pip, hence $1.67 per pip risk means that you need to trade 0.16 (0.167 rounded down) standard lots.

When converting to lots round down rather than up to ensure that your total risk never exceeds $50.

I’ve a question about money management; I don’t know how to calculate the lot size.

 

I have the capital, the risk percentage, the risk in money and the stop loss that I’m going to use, but I don’t know how to get the lot size and I need it to trade.

 

For example:

 

Capital: $1000

Risk percentage: 5%

Risk in Money: $50

Stop Loss: 30

 

 

And how do I get the lot size?

Could somebody help me?

 

Thanks in advanced.

Here is a free position size calculator

http://www.forexcalc.com/

Hi rdlrn19,

 

Risk/Stop = $50/30 = $1.67 (to 2 d.p.) per pip risk.

 

0.1 standard lots = $1 per pip, hence $1.67 per pip risk means that you need to trade 0.16 (0.167 rounded down) standard lots.

 

When converting to lots round down rather than up to ensure that your total risk never exceeds $50.

hi SoundFX,

Value per PIPS for US crosses like AUDUSD, GBPUSD, EURUSD etc are USD1.00 per pip. But not for EURJPY, EURGBP, USDCAD, USDCHF etc. How do we compute the value per pips for these crosses?

Is there a function that we could use in EA programming that could give us the correct pip value?

Thanks.

Just found the answer to my own questions ;-)

The function MarketInfo(Symbol(),MODE_TICKVALUE) will return the value of a PIP in the currency of our equity account. Very useful in calculating our position sizing.

Thanks for this thread that prompted me to look further.

Time to get serious...

I don't want to sound mean, but for anybody who is in a position where they are so new to trading, that they don't understand the basic Fixed Fractional money management formula, then 5% risk is going to be too high.

Professional traders approach trading firstly from the point of risk management. The MOST IMPORTANT thing in trading is to protect your capital – even if it’s only 50 bucks. Too many people become undisciplined with small amounts, but this is a bad, bad habit to get in to. The good news is that if you grasp money and risk management early in your trading career then you'll take a huge leap because the processes for managing 50 bucks is the same for managing $50,000 or $5,000,000.

Also, risk shouldn't be a fixed stop loss of say 30 pips. Risk - intelligent risk - is a stop loss in a sensible price action position where you do not expect price to go based on your setup remaining valid. Depending on price volatility and structure that stop loss could be 50 pips, 100 pips or 15 pips when considered against the traded timeframe and setup conditions. Using fixed stops is ignoring the prevailing market conditions and stands a much greater chance of getting stopped out by noise even though your original setup idea turns out to be valid. Stop placement is a massive subject in itself but let’s take an example….

$1000 Capital

Maximum Capital Risk per trade = 2% (though preferably lower)

2% of a Capital of $1000 = $20 risked per trade

Stop Loss of 10 pips / $20 allows 20 Micro Lots position size

Stop Loss of 20 pips / $20 allows 10 Micro Lots position size

Stop Loss of 30 pips / $20 allows 6 Micro Lots position size (rounded down from 6.6)

Stop Loss of 50 pips / $20 allows 2 Micro Lots position size (rounded down from 2.5)

Stop Loss of 100 pips / $20 allows 1 Micro Lot position size

The sense in this approach is that your stop loss can still be put in a sensible place based on price action and yet your attenuated position size still allows you to maintain your risk (2% in this example). Oanda allows infinitely small position sizing to cater for huge pip level stop losses but still maintaining standard % risked.

Of course after you’ve worked out your Risk you need to demand an appropriate Reward for that Risk. A ratio of at least 1 to 1.5 should be required and preferably higher but this is dependant on trading plan and style. But with 1:1.5 Risk/Reward that at least allows you to theoretically win only 50% of your trades and still be profitable. Then you can get into scaling out of positions or pyramiding in etc – but that’s a refinement that will come if you can get this level sorted.

This is a big topic and fixed fractional sizing is only one option amongst Fixed Ratio, Kelly and other rocket science options. It may be boring but this is what brings the money in. If you get your money & risk management sorted then you’ll find trading a lot less stressful and each trade becomes business-like where you don’t care about taking losses so long as you work your trading plan, take the losses and take the bigger wins. As your capital grows your position size grows whilst staying at the same % risked. 10% growth per month (very achievable I’d say) once compounded, very quickly becomes a huge amount of money. But it won’t become any amount of money if you don’t know how to manage it in the first place.

Hi Jason,

You're right about non-USD crosses not being $1 per pip - I should have mentioned that my calculation only applies to the typically traded XXX/USD pairs like EUR/USD and GBP/USD.

There are various handy on-line pip value calculators to calculate pip value for EUR/JPY etc. on the web, here's one:

http://www.goforex.net/pip-calculator.htm

Time to get serious...

 

Professional traders approach trading firstly from the point of risk management. The MOST IMPORTANT thing in trading is to protect your capital – even if it’s only 50 bucks. Too many people become undisciplined with small amounts, but this is a bad, bad habit to get in to. The good news is that if you grasp money and risk management early in your trading career then you'll take a huge leap because the processes for managing 50 bucks is the same for managing $50,000 or $5,000,000.

 

Also, risk shouldn't be a fixed stop loss of say 30 pips. Risk - intelligent risk - is a stop loss in a sensible price action position where you do not expect price to go based on your setup remaining valid. Depending on price volatility and structure that stop loss could be 50 pips, 100 pips or 15 pips when considered against the traded timeframe and setup conditions. Using fixed stops is ignoring the prevailing market conditions and stands a much greater chance of getting stopped out by noise even though your original setup idea turns out to be valid. Stop placement is a massive subject in itself ....

 

Of course after you’ve worked out your Risk you need to demand an appropriate Reward for that Risk. A ratio of at least 1 to 1.5 should be required and preferably higher but this is dependant on trading plan and style. But with 1:1.5 Risk/Reward that at least allows you to theoretically win only 50% of your trades and still be profitable. Then you can get into scaling out of positions or pyramiding in etc – but that’s a refinement that will come if you can get this level sorted.

 

This is a big topic and fixed fractional sizing is only one option amongst Fixed Ratio, Kelly and other rocket science options. It may be boring but this is what brings the money in. If you get your money & risk management sorted then you’ll find trading a lot less stressful and each trade becomes business-like where you don’t care about taking losses so long as you work your trading plan, take the losses and take the bigger wins. As your capital grows your position size grows whilst staying at the same % risked. 10% growth per month (very achievable I’d say) once compounded, very quickly becomes a huge amount of money. But it won’t become any amount of money if you don’t know how to manage it in the first place.

Hi JimJamBonks,

Thankyou for sharing a peek into a ProTrader's thinking!! This is very advanced stuff and I for one would love to hear more. Please, pleaes continue... [-O< :)

I totally agree, protect your capital is rule number 1. (i think buffett has the same rules?)

Stops - i think your point is they should be Dynamic, and move with the market, is that right? Things like Suppport/Resistance, Fibs?

Risk Reward Ratios - do you think in theory it will only work if you take trades to their full targets? I know there are other factors but just for simplicity, say you always take trades with a minimum 1:1.5 RRR, BUT say 50% don't run to full target? I think it would be very dependent on expectancy (Probability of Win * Average Win) – (Probability of Loss * Average Loss)

Can you recommend any reading etc. for pyramiding and scaling into/out of trades? (I currently scale into trades but consider myself a novice)

May I ask what kind of range of true leverage you use and money management system?

I believe Richard Olsen (oanda) has an important paper on leverage - the optimum being on the order of 4:1. Will definitely surprise most I think, especially those who wash out... we've all been there.

Really looking forward to hearing your thoughts,

mlee

Before you can determine the value of any plot of land, you must first know how large the plot is. This means that being able to calculate a plot's size is an essential skill for anyone looking to buy or sell real estate. However, land lots come in all shapes, which means that the standard method for calculating their size might be slightly different than you expect. The easiest way to perform this calculation is with the use of an online calculator.

http://www.forex-metal.com/affiliate/47225/1

First, you can cease with the spamming. Second, if you knew the slightest thing about the forex, you would know that when the poster was referring to lots, he was talking about the forex, not real estate land. Let's cease the unnecessary postings.

This is how you calculate lot size:

Lot Size = Amount Risked / Number of Pips x Pip Value

Let’s say we take a trade in EURUSD:

Capital is USD1,000.

Amount Risked at 5% of capital is USD50.

Number of pips is the stop loss pips, which in this case is 50 pips.

Pip Value for EURUSD is USD10

Therefore, Lot Size = USD50 / 50 x USD10 = 0.10

Leverage does not factor into calculation of lot size. Leverage determines the required margin to enter a trade position. Thus, using the above as example, at a leverage of 1:200, your required margin to enter the position is ($100,000 x 0.10) / 200 = $50.

So out of your capital of USD1,000, a margin of USD50 will be locked away to enter this position.

Hope this helps.