Importance of Forex Position Calculator
If you are a trader, you should know that one of the most important tools that you should always bring is the forex position calculator. It is instrumental in managing every single risk that can be encountered along the way. Position sizing is recognized as the key towards better risk management that prevents the scenario wherein your foreign exchange account has to be closed just because you have made a major mistake within a single trading cycle.
Technology has worked for the betterment of the forex position calculator. Years back, experts will need a few minutes to come up with and calculate the desired parameters. But now, all you have to do is to supply the required information and you will get the result within seconds. The resulting parameters are an approximation of the amount (in units of the desired currency) to purchase or to sell in order to take control of the maximum risk that can be held per position.
Traders' position size is determined by their size-types lot. Those size ranges from a standard lot is 100,000 units, a mini lot is 10,000 units, and a micro lot is 1,000 units and the number of lots when they buy or sell.
To help you get the right position size in forex trading, here are the things that you have to consider.
1. The Account Risk Limit per Trade
In deciding the account risk limit per trade you need to set the percentage or dollar amount limit for each trade. Commonly, professional traders risk 1% or less from their account.
For instance, if your trading account has $10,000 with a 1% limit, then you can risk $100 per trade. While, if you use a 0.5% risk limit, then you risk $50 per trade.
2. Trade Risk
The investors should then fund out as to where they should place their stop-loss order pertaining to trading a particular asset or security. If a trade is trading shares, then the trade risk is the difference between the stop-loss price and intended entry price.
For instance, if a trade is willing to purchase a share at Rs 180, and likes to place the stop-loss order at Rs 150, then the trade of that trader is Rs 30 per share.
3. Introduction to lot sizes and pip values
In Forex trading, the position size is determined by the amount of "Lots" that you trade. There are 3 different Lot types in Forex trading: Standard Lots, Mini Lots, Micro Lots
Depending on which size you trade, the pip value changes. Here are a few examples:
1 Standard lot >> 1 pip is $10 worth
1 Mini Lot >> 1 pip is $1 worth
1 Micro Lot >> 1 pip is $ 0,1 worth
10 mini lots equal 1 standard lot and 10 micro lots are the same as 1 mini lot.
Pip-values differ for different currency pairs. Here is a list of currency pairs and how their pip value changes for different currency pairs
4. Determine Position Size for a Trade
The ideal position size can be calculated using the formula:
Pips at risk * pip value * lots traded = amount at risk
In the above formula, the position size is the number of lots traded.
Let's assume you have a $10,000 account and you risk 1% of your account on each trade. Thus your maximum amount to risk is $100 per trade. You're trading the EUR/USD pair, and you decide you want to buy at $1.3051 and place a stop loss at $1.3041. That means you're putting 10 pips at risk ($1.3051 – $1.3041 = $0.001). Since you've been trading in mini lots, each pip movement has a value of $1.
If you plug those numbers in the formula, you get:
10 * $1 * lots traded = $100
If you divide both sides of the equation by $10, you arrive at:
Lots traded = 10
Since 10 mini lots are equal to one standard lot, you could buy either 10 minis or one standard.
You can learn more about how to calculate forex trading position size at this forex forum.