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When you place a trade, you must decide how many lots you want to trade.
Let’s say you are buying EUR/USD with a 50 pip stop-loss. Should you trade the same number of lots as a USD/JPY trade with a 30 pip stop-loss? How do you make that calculation?
How do you decide in the first place how much of your account to risk on a single trade? That’s the real decision you are making when you decide how many lots to trade.
In this lesson we will take you through an easy process to make sure you risk just the right amount on every trade to help protect your capital but still let it grow.
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In this lesson, we are going to talk about how much risk-capital you should risk on a single trade.
When you enter a trade, you must decide the most you would let that trade cost you in your account if it went against you.
Why? Because to be profitable, you must know that a trade cannot create a large hole in your account that you may not be able to recover from.
So, what is the maximum loss you are willing to take per trade? In trading language, what is the size of your stop-loss? And what is that as a percentage of your total account size?
Don’t worry if all that doesn’t seem clear right this second. Let’s make sense of it with an example.
Let’s say that you start off with a $10,000 account. And you want to buy EUR/USD at 1.2350.
But before you buy, you should already know where you want to get out if the price goes against you. That level that is your stop-loss.
Let’s say you know that if the price goes down by 40 pips, or to 1.2310, you should be out of the trade.
How big is that 40 pip stop-loss in your account in actual dollars? Well, that is your decision to make. You must decide not only in dollar terms, but more importantly as a percentage of your account size, how much you will let every trade potentially cost your account before you get out.
What is a good percentage to risk on your account for a single trade? Most successful traders recommend a maximum of 2% per trade. Some traders are happy with 2%; some want less than 1%. But to keep it simple, we will use 2%.
2% of your $10,000 account is $200.
That means for a 40 pip stop-loss, each pip is worth $5. On a EUR/USD trade, that is 0.5 standard lots.
The easiest way to calculate this for yourself is to use the position size calculator at DailyForex.com. It does what it suggests – it calculates the lot size of your positions! Click here to access it! Plug your numbers into the calculator and it will pop out an answer for you. You do not have to work it out by hand every time you want to trade.
In this video we’ve covered one example. But different trades will require different lot sizes depending on the pair and the stop-loss size. And as your account value changes, you will also be changing your position sizes. In the next and final lesson in this course, we will be looking at how much profit you should aim for on your trades.
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