In this educational article, I will teach you how to apply a position size calculator and calculate a lot size for your trades depending on a desired risk.
First of all, let's briefly discuss why do you need a position size calculator.
Even though, most of the newbie traders trade with the fixed lot, the truth is that fixed lot trading is considered to be very risky.
Depending on the trading instrument, time frame and a desired stop loss, the risks from one trade to another are constantly floating. With the constant fluctuations of losses per trade, it is very complicated to control your risks and drawdowns.
A lot size calculation, however, allows you to risk the desired percentage of your capital per trade, limiting the maximum you can potentially lose.
A lot size is calculated with a position size calculator.
It is integrated in some trading platforms like cTrader. If it is absent in yours, there are a lot of free ones available on the internet.
For the sake of the example, we will apply the one available on babypips web site.
Link - https://www.babypips.com/tools/position-size-calculator
Measure a pip value of your stop loss.
It is the distance from your entry level to your stop loss level.
In the example on the picture, the stop loss is 290 pips.
Open a position size calculator
Fill the form.
Inputs: Account currency, account balance, desired risk %, stop loss in pips, currency pair.
In the example, we are trading with USD account. Its value is $20000. Trading instrument is EURUSD.
Calculate a lot size
The system will calculate a lot size for your trade.
0.069 standard lot in our example.
Taking a trade on EURUSD with $20000 deposit and 290 pips stop loss, you will need 0.069 lot size to risk 1% of your trading account.
Learn to apply a position size calculator. That is the must-use tool for a proper risk management.