Forex Basic Training - Lot Size and Risk - #2 in a series by Mary Leonard

Here's a formula that you need to know inside and out... you can figure your risk, your lot size, and your potential loss for any trade. This information is a "must know" whether you are trading manually or using an Expert Advisor (EA) or robot, or using a combination.
LotSize = (Your Desired Risk x Available Amount)/(PIP Value x Your Stop Loss)

As you can see, you can select any of the variables to manipulate your risk and possible loss.

LotSize = will be expressed in terms of Standard or mini lot depending on how you express PIP Value.

Your Desired Risk = is expressed in decimal form. If you want to risk 5%, you would enter .05.

Available Amount = the amount of money in your account that is available to invest. If you have no outstanding trades then it is the entire amount. If you have outstanding trades, then it is the Free Margin amount.

PIP Value = Simply, a PIP is the amount of money you gain or lose for every pip a currency goes up or down. For currency pairs with USD as the quote currency (the 2nd currency, e.g., EUR/USD), the PIP Value for a Standard lot is always $10, for a Mini lot, $1, and for a Micro lot it is $.10. It's a bit more complicated for other currency pairs. There are many free PIP Value calculators on the web you can use to determine the value for any currency pair. Make sure you know the type of lot used in your account (standard, mini, or micro) so that your PIP Value will be accurate.

Your Stop Loss = is the stop loss in pips that you want to set on the trade.

Example:

Account balance = $3000. Standard lot size Currency = EUR/USD PIP Value = $10 Want to risk = 5% Stop loss = 500

LotSize = (.05*$3000)/($10*500) LotSize = 150/5000 LotSize = .03 (standard lot)

So a trade using EUR/USD for .03 standard lots would risk a maximum of $150 in the account.

You can express the formula in different ways to solve for different variables and adjust the variables to get the trade parameters that you want.

For a discussion of Margin and Leverage see Forex Basic Training - Margin and Leverage - #3 in a series.