I’ve read countless books and trawled through numerous websites but still can’t get my head around working out lot sizes. I think its because the examples are using account sizes of £10k+. I’m sure its all very simple but I’m
So can anyone explain how I would work out lot size assuming:
[ul]a £1k starting account balance[/ul]
[ul]looking to risk (i.e. if the trade goes wrong lose a maximum of) 2% of the account on each trade[/ul]
[ul]alternatively how to work out lot size if I commit 2% of account size to a trade[/ul]
[ul]aim of making 20 pips a trade[/ul]
[ul]a stop loss of 10 or 20 pips?[/ul]
Lot(s) = ((Account Size * %Risk/100) / |Entry - Stop Loss|)/(Pip value per lot)
Leverage does not enter the equation unless the equation tells you to purchase a contract size that is larger than what you’re already able to purchase (in that case, you will need to increase your leverage).
If you have a 2% stop loss, with a value of 1 GBP per pip (mini lot) you can have a maximum stop of 20 pips, so it would be a good idea to find an account that lets you do micro and nano lots, otherwise you’re always going to be stuck with 20 pips max stop loss.
If you have a 20 pip profit target (after commissions) and a 20 pip stop loss, you have a 1:1 risk reward ratio. That means you have to be right (that is, hit your profit target entirely) 60% of the time or more to be profitable. With a 10 pip stop loss you have a 1:2 risk reward ratio, so you can afford to be right 40% of the time over the long haul and still make a profit.
Based on my limited experience, a 10 pip stop loss is fairly suicidal unless its a very quiet market (which, alas, is prone to stop runs).
[B]Number of Lots = [(Account Balance, in GBP) x (Risk %)] / [(Stop Loss, in pips) x (Pip Value, in GBP)][/B]
To use one of your examples, let’s say:
[ul]
[li]you have a [B]mini-account[/B] denominated in GBP
[/li][li]your account balance is [B]1,000 GBP[/B]
[/li][li]you want to trade the GBP/USD
[/li][li]your set-up is based on a stop-loss of [B]20 pips[/B]
[/li][li]and you want to risk no more than 2% of your account on this trade; Risk % = 2% = [B]0.02[/B]
[/li][li]the current pip-value for the GBP/USD (get this from your trading platform) is [B]0.6130 GBP/pip/mini-lot[/B]
[/li][/ul]
Returning to the formula,
[B]Number of Lots = [(1,000 GBP) x (0.02)] / [(20 pips) x (0.6130 GBP/pip/mini-lot)] = 1.63 mini-lots[/B]
If you trade in whole numbers of mini-lots, then you would round this down to [B]1 mini-lot.[/B]
If you trade in micro-lots (1,000 units of base currency), then you could trade [B]16 micro-lots.[/B]
If you trade in one-GBP increments, then you could trade [B]16,300 units of base currency (GBP)
[/B]
In the example above, the pip-value for the pair you are trading was provided by your broker’s trading platform. If your platform does not give you this information, you can use an on-line pip-value calculator to determine this value. You will need to enter
3 items of information: your account currency, the pair you are trading, and the current ASK price of the pair.
In the example above, I used Friday’s closing ASK price for the GBP/USD and a pip-value calculator at:
