Say we have opened a trading account with $1000 dollars. We always want to risk 2% of our account
on each trade, so we multiply our account balance by 2% ($1000 * .02) and get $20.
So if a trade fails we want to only lose $20. We know how much we want to risk, now it’s time figure
out what lot size give us that amount of risk. The formula for that is easy…
After we’ve planned our trade and know what our stoploss is going to be (we’ll learn how to do that
later) we simply divide our risk by our stoploss. So if we want to risk $20 and our trade has a stoploss
of 50 pips, then we divide $20 by 50 pips and get 0.4 dollars per pip. We know 1 micro lot equals 10
cents per pip, so to trade 40 cents per pip we need to trade 4 micro lots.
1 micro lot = 1,000 units. so 4 micro lots would be 4,000 units. How do you buy 4,000 units when you start with $1000? Isn’t 1 unit = $1?
Leverage. When you deposit money with a broker they allow you to play with more money than you have. if leverage is 50:1 and you deposit $1,000 then you have at your disposal $50,000 max to play with. Of course it’s not a good idea to use max leverage on single trade.
Leverage is what makes it possible to trade according to the calculations above. All calculations are the same your balance doesn’t change only risk vs reward.
You’re not risking the whole 4000 just what ever a pip is worth and how many pips it goes against you. So say a pip is worth 40 cents and your stop loss is 20 pips away from your entry, then you are risking 20 times 40 cents which is $8.00
and how much a pip is worth depends on what your trade size is whether its a mini lot or four mini lots or whatever. And leverage tells you how big a trade size you are allowed to have.
thanks guys