Calculating the size of the position
In Forex, when it comes to operating, as much or more important is risk management that the strategy we have to get in and out of the market. Therefore, we must calculate at all times the optimal size of each position. In this way we will be able to maximize benefits and minimize long-term risks, as well as protect the capital of the account.
With a good risk management, in each operation we will operate with the appropriate volume, depending on the distance we put the stop loss. In other words, it is not the same to enter with 3 lots when the stop loss is at 50 pips, which when it is 5 pips. Obviously the closer this our stop, the more volume we will be able to enter maintaining a constant risk in each one of the operations that we carry out.
What should be taken into account when calculating the size of the position?
To calculate the size of each position correctly, first we have to set the risk for maximum operation that we consider appropriate. This decision depends on each person and their aversion to risk because the more risk we establish by operation, the less consecutive operations in which we will be able to incur losses before the account reaches zero. As we have said, the risk taken depends on each one but the usual is that the risk is between 1% and 5%.
This percentage tells us the percentage of our account that we will risk in each operation, which in turn is the money we will lose at maximum in each operation. If for example we have an account of $1000 and we decided to risk 3%, we will be risking $30 (1000 x 0.03) in each operation that we decide to open (as long as the account is kept in $1000). I mean, $30 will be the amount of money that, at most, we’ll lose by operation. If after doing a few operations, our account increases to $1200 and our risk remains at 3% our positions will have a risk of $36 (1200 x 0.03).
To determine the volume of each operation, we must first decide the distance to which we will place the stop loss, this is the distance in pips that our operation can be turned against without automatically closing. In addition, we must also determine the value of each PIP, which will depend on the pair we choose and whether the account is standard, mini or micro.
So that in each of the operations that we carry out we are risking the same percentage we will have to look at:
Stop-loss distance in Pips
Currency pair account type pip value
All the calculation necessary to determine the volume of each operation, depending on the characteristics of the position just quoted, we can do with “pips calculators.” These calculators can be found on the Internet and facilitate the calculation of the volume, because when the quoted currency differs from the pair that we are going to operate with the currency in which we have called the account, the calculation will be complicated a little more.
Following the example above:
Account Capital = $1000 (bill in dollars)
Risky percentage = 3%
Stop-Loss distance = 30 pips
Currency pair = Eur/USD
Account Type = Mini
Pip value = $1
In this example, the 3% risk is $30. Well, that will be the capital we lose in the event that we skip the stop loss, placed at 30 pips. If each PIP is worth $1 (each PIP is worth $1 in case the quoted currency is the $ and we have a mini account), we can enter with a mini-lot as 30 pips = $30.
If we had opened the operation with 2 minilotes, this is to withstand a 6% risk because at the time the price touched the stop loss would have lost $60.
If on the contrary, the distance of the stop loss are 100 pips, operating a minilote would risk exposing 10% since 100 pips = $100, so we must open the position with a smaller volume. In this case the volume would be 0.3.
To practice a correct management of the position you can do it with a demo account, like for example with the account of AxiTrader, who through the platform MetaTrader 4 offers you 61 pairs of currencies to operate, in which it allows to operate with Microlots, Minilotes and Lots. AxiTrader has 10 years of experience in the markets and is regulated by the British FCA. In addition to the forex market, it also offers CFDs on raw materials, precious metals and stock indices.
In addition to the MetaTrader 4 platform in its different versions (PC, Web, Mac, and mobile), AxiTrader also offers the MT4 NexGen platform. This is a more complete platform than the traditional MetaTrader 4, it has sentiment indicators, correlation operators, Alarm manager, economic calendar, Operations diary and many more applications to facilitate decision making to Time for trading. It also has a demo account so you can try it.