How to calculate best trade size in Forex? Experts believe that there is a formula for determining your perfect trade size, based on your risk tolerance.
AtoZForex - Every trader in Forex market is seeking to earn some money. However, not everyone is thinking about the same amount of money, when it comes to trading. Where one is satisfied with small trade size, another would definitely go for much bigger size. Is there a right trade size? Let’s see…
Are you a risky person?
Nature gifted everyone with different ‘packages’ of perceptions and characteristics and all of us are unique. Thus, what one trader might consider ‘risky’, could be a perfect trade size for another trader. Here we talk about risk perception, with risk management being the base for the determination of the trade size. Every trader in Forex opens a trade in accordance with his/her risk tolerance. Therefore, when a trade size becomes too big for your perception, risk starts to outweigh the anticipated reward.
Let’s apply this principle to real life. Imagine that you need to cross a dangerous simple suspension bridge to get to a beautiful garden on the other side. Also, there is an option to take a safer road - a concrete bridge, but it is few kilometers away. Where some people would choose the hanging wooden bridge because they believed it is worth the risk. However, some of them might think that the reward is not worth the risk. They choose the longer and safer road.
Trading on Forex works in the same way. In case you are okay with investing a larger amount of money, you might get more money back quicker. Yet, there is an opportunity you might lose your funds quicker, as well.
How to manage your risk?
Trading experts are saying that it is vital that you have the formula to manage your risk, which is based on your risk tolerance. And eventually, how to calculate best trade size in Forex?
The first thing you need to think about is what percentage of your capital you are willing to risk on each trade. In case you know the amount of money you are willing to lose on a particular trade before entering it, the level of stress related to loss will be significantly smaller. Forex experts believe that this percentage should be somewhere between 1 and 3% of your account’s equity to each individual trade. In order to keep everything organized, you might want to record your trading activity in a journal. Here, you need to update the information about your account’s equity each time you enter a trade.
The second step is to determine where you set your stop loss levels. The stop loss levels are determined in terms of pips, meaning that the system will tell you that you were wrong at a specific area, in spite all your intentions.
How to calculate best trade size in Forex?
Now, when you have your risk percentage and stop loss level determined, you can calculate the best trade size based on pip-based exit. The calculation is as follows:
- Take your account balance and multiply it by your risk percentage
- Then divide the amount by stop loss distance (in pips)
- Here you get your maximum acceptable value per pip.
No matter which risk acceptance and which trade size you decide is good for you, you need to assure you are consistent with your risk percentage.
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