How to determine the size of your position in Forex trading (2024)

Choosing the volume of a trade is a big challenge for beginner traders. Let’s sort it through!

To open a trade in MetaTrader, you click on a new order button. In the window that appears, you choose the symbol (a currency pair, a metal, an index, or a stock you want to trade). You also need to decide on volume or, in other words, the amount of money you’ll spend on this trade.

How to determine the size of your position in Forex trading (1)

Trade volume is important because it will determine how much money you will gain or lose in this trade.

There are several ways to choose the size of your position.

Fixed Forex lot size

The idea here is that a trader uses the same trade volume in lots for every trade. This way is simple to understand for those who have only recentlystarted trading. It’s recommended to choose small trade sizes. It’s possible to change the position size if the size of your account significantly changes. The point value will be the same for you all the time.

Example

You have $500 on your account. With 1:100 leverage, this amount will be enough to make 50 trades of 0.01 lot each. Each trade will require a $10 margin.

If you use the samelot size every time, your account can show stable growth. This is a good option for those who can’t easily adjust to the exponential growth of their trade volumes because of the higher stress levels that are associated with it. More experienced traders, however, may want to have an approach with greater flexibility and bigger potential account expansion.

Trade volume as a percentage of equity

In this case, you choose the size of your position as the percentage of your equity. If your equity increases, so do your position sizes. This, in turn, can lead to the geometric growth of your account. At the same time, it’s necessary to remember that the declines of your account after losing trades will be bigger as well.

The recommendation is not to use more than 1-2% of your deposit for one trade. This way even if some of your trades aren’t successful, you won’t lose all your money and will be able to keep trading.

Here’s a formula of the position size in lots:

Lots to trade = Equity * Risk(%) / Contract Size * Leverage

Example

You have $500 and decide that the acceptable risk level is 2% of your account. With 1:100 leverage, your need to choose ($500 * 0.02) / 100,000 * 100 = 0.01 lots.

With $1000 on your account, you will be able to trade ($1000 * 0.02) 100,000 * 100 = 0.02 lots.

This approach is not the best option for smaller accounts. It may happen that if you have a large loss, the risked percentage will be too small to act as a margin even for the smallest lot size. As a result, you’ll be forced to break your risk management rules and allocate more money to keep trading. Moreover, as this approach doesn’t take into account what’s happening on the price chart, the size of Stop Loss it allows may be too big.

As the position size depends on equity, the loss will make the position size smaller, so it will be harder for a trader to recover the account after a drawdown. At the same time, if the account becomes too big, the size of each trade may become uncomfortably big as well.

Trade volume as a percentage of equity with a Stop Loss

Here you base your position size not only on the predetermined percentage risk per trade but also on yourStop Lossdistance. Let’s break this process in 3 steps.

Step 1.The recommendation stays the same: don’t risk more than 1-2% of your deposit/equity for one trade.

If your equity is $500, 2% risk will cost you $10.

Step 2.Establish where the Stop Loss should be for a particular trade. Then measure the distance in points between it and your entry price. This is how many points you have at risk. Based on this information, and the account risk limit from step 1, calculate the ideal position size.

If you want to buy EURUSD at 1.11000 and place a Stop Loss at 1.10500, your trade risk is 500 points.

Step 3.And now you determine position size based on account risk and trade risk. In other words, you need to determine the number of lots to trade that will give you the risk percentage you want with the stop distance that fits your trading system.

The important thing is to adjust your position size to meet the desired stop loss and not the other way round. Your risk will be the same in every trade, but the position size may be different because Stop Loss distances may vary.

Remember that a 1,000-unit lot (micro) is worth $0.01 per point movement, a 10,000-unit lot (mini) is worth $0.1, and a 100,000-unit lot (standard) is worth $1 per point movement. This applies to all pairs where the USD is listed second, for example, EURUSD. If the USD is not listed second, then these point values will vary slightly. Note that trading on a standard lot is recommended only for professional traders.

Use the formula:

Lots to trade = Equity * Risk% / (Stop Loss in Points * Point Value) / 100

Example

As it turns out, you will be able to trade $500 * 0.02 / (500 * $0.01) = $10/$5 = 2 micro lots. In other words, you should put 0.2 as the trade’s volume. The outcome is in micro lots because the point value used in the calculation was for a micro lot.

Your next trade may only have a 200-point stop. In this case, your position size will be $10/(200x$0.1) = $10/$20 = 0.5 mini lots, or 5 micro lots.

If you use this method, your position sizes will increase proportionally to the increase in your account(the opposite will happen if your equity decreases) and will be adjusted for the situation on the charts. As with the simple equity percentage technique, however, this option may also leave little room for maneuver if your account is small. In addition, this method won’t suit you if your trading strategy doesn’t involve knowing the exit levels in advance.

Conclusion

So, what is our ultimate recommendation for choosing a position size? It’s actually that you should pick the option you feel most comfortable with. As you can see, all techniques have their advantages and drawbacks, so the method that works well for one trader may not suit another. Much will depend on your trading strategy: does it imply big profit but the risk of big drawdowns as well or does it offer multiple opportunities for smaller profit? That will matter for your decision.

Although all these calculations related to position sizing may seem unpleasant, it’s in your best interest to get to the bottom of them. Knowing how to choose the right position size will make you a more disciplined trader and provide you with soundrisk management. This is the way to maximize your profit and minimize your loss!

How to determine the size of your position in Forex trading (2)

FBS Analyst Team

More by this author

2023-05-25 • Updated

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  • How Much Do You Need to Start Trading Forex
  • Forex Demo Account
  • Leverage and Margin: How Can You Use Them in Forex Trading?
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  • Currency Pairs in Forex Trading
  • What Software Do You Need for Trading?
  • The Advantages and Risks of Trading Forex
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How to determine the size of your position in Forex trading (2024)

FAQs

How to determine the size of your position in Forex trading? ›

Position sizing based on risk percentage

This percentage represents the trader's risk per trade. Once they have established the amount they are comfortable risking, they can calculate the appropriate lot size for a specific trade using the following formula: Lot Size = (Risk Amount / (Stop Loss in pips * Pip Value)).

How do I know my forex lot size? ›

Position sizing based on risk percentage

This percentage represents the trader's risk per trade. Once they have established the amount they are comfortable risking, they can calculate the appropriate lot size for a specific trade using the following formula: Lot Size = (Risk Amount / (Stop Loss in pips * Pip Value)).

How do you calculate position size options? ›

Proper Position Size

The investor now knows that they can risk $500 per trade and is risking $20 per share. To work out the correct position size from this information, the investor simply needs to divide the account risk, which is $500, by the trade risk, which is $20. This means 25 shares can be bought ($500 / $20).

How do you set position size? ›

To achieve the correct position size, traders need to first determine their stop level and the percentage or dollar amount of their account that they're willing to risk on each trade. Once we have determined these, they can calculate their ideal position size.

How do you scale a position in forex? ›

To scale in, you select two or more entry levels for a trade instead of one. You open your position at the first entry level with a small total size, then add to it at each subsequent one.

How many dollars is 0.01 lot size? ›

This lot size accounts for 1,000 base currency units in every forex trade, determining the amount of a particular currency. Suppose you're trading the USDJPY (U.S. Dollar-Japanese Yen) currency pair, and the base currency is the USD. In that case, a 0.01 lot is equivalent to 1,000 U.S. dollars.

What lot size is good for $100 forex? ›

When you trade forex with $100, it's recommended to open trades of no more than 0.01-0.05 lots so that risks should not exceed 5% of the deposit amount. To trade forex with $100, you will need the maximum leverage to lower the margin amount blocked by the broker.

What is a good position size? ›

Depending on the financial instrument you're trading – e.g. forex, metals, oil, or indices, – most successful traders would say a 1 - 2 percent per trade risk is a good rule of thumb.

What is the optimal position size? ›

The position size should be defined by how much equity one stands to lose if a trade goes against him. Instead of unscientifically picking a number, the maximum risk should not be more than 1.25 to 2.5% of equity on a single trade.

What is position sizing for active traders? ›

Position sizing is all about working out how much capital to dedicate to a particular trade with the capital you have available. The popular 5% rule is widely used, which means that no more than 5% of the trading capital can be placed on one trade. For instance, if your capital is Rs. 100,000/-, then no more than Rs.

What is an example of position sizing? ›

There could be more position sizing methods. This is a very straightforward method where the capital is equally distributed in each trade. For example, if your capital is ₹5 lakh, you may want to allocate 10% (or ₹50,000) to each trade.

What is trade size in forex? ›

The number of units of product in a contract or lot.

How to increase position size? ›

4 Ways to Increase Your Position Size
  1. Use the 5-3-1 Trading Strategy. An excellent method to increase your position trading size is to use the 5-3-1 trading strategy. ...
  2. Focus on Win/Loss Rate, Not the Account Balance. ...
  3. Trade Large and Small Positions Size Simultaneously. ...
  4. Adopt the Go Big or Go Home Mindset.
Aug 15, 2023

What is the 5 3 1 rule in forex? ›

The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades. One time to trade, the same time every day.

What is 90% rule in forex? ›

The 90 rule in Forex is a commonly cited statistic that states that 90% of Forex traders lose 90% of their money in the first 90 days. This is a sobering statistic, but it is important to understand why it is true and how to avoid falling into the same trap.

What is the trading position formula? ›

The ideal position size for a trade is determined by dividing the money at risk or account risk limit by your trade risk. Taking forward the example we considered in the first section, The total account size is Rs. 50,000, and you set the account risk limit per trade at 1%.

How do I check my lot size in MT4? ›

You can find the information about the lot type used on a Forex trading account in the MT4 contract specialization. In the Market Watch tab, right-click on the asset (currency pair) and select the Specification tab. The minimum transaction volume for the GBPUSD pair is 0.01; the maximum is following the specification.

How big is a 100 lot in dollars? ›

As mentioned earlier, a standard lot represents 100,000 units of the base currency. So, 100 lots would represent 10 million units of the base currency. To put this into perspective, let's use the currency pair USD/JPY as an example. If you were to buy 100 lots of USD/JPY, you would be buying 10 million US dollars.

What is the size of a 0.10 lot in forex? ›

Conclusion. A 0.10 lot size in Forex represents a position size of 10,000 units of the base currency, and it is commonly referred to as a "mini lot." This lot size is one-tenth the size of a standard lot and offers traders greater flexibility in risk management, position sizing, and account diversification.

What is the best lot size for $500? ›

It is better to trade with 0.05 lot if you have $500 account. If you are risking 50 pips per trade with 0.5 lot, you will lose all your capital if there are 10 consecutive losses. On other hand with 0.05 lot you can try for 100 times & you can save your capital.

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