When people say use 1% of your deposit on a forex trade, so what does that mean and how do you do it?
So on meta trader if i deposited £1000 and wanted to use 1% on all trades, would I need to change the lot size to something like 0.01?
Last question, I know different lot sizes can be used on metatrader4 but why did XM (my broker) ask what lot size I wanted? think the options were XM micro, micro, standard and nano. Why would they ask that if I can make the lot size changes on metatrader?
Your risk is a function of your position size and the distance from your entry to your stop loss. So you can regulate your risk by adjusting your position sie (as you suggest) or by adjusting where you place your stop loss.
So, if you are trading on the D1 with a 1k account, you will probably find that even with the minimum position size (0.01 lots for most accounts) you have to be careful about how wide you make your stop loss.
Trading on the H1, though, where stops are likely to be much closer, you may well find that you are using a position size of 0.05 lots or so.
Check out the babypips positions size calculator before opening your position to work out what your risk for any given stop/position combo is.
CALCULATE… 1% x $1000 = $10 right ?
this is your Max Risk per trade
PLAN YOUR TRADE - Figure out where you will put your stop loss, this will determine your Max Lot Size
Example
Use the formula $10 / Stop Loss Distance from entry in Pips = Cost Per Pip
Example if Stop loss was place at 10 pips you wold do this
$10 divided by 10 pips = $1 per pip so with currencies, you would set a MAX LOT SIZE OF 0.1 Lots
because 0.1 lots = $1 per pip
Now if you wanted to set it at 50 pips
it would be this (pay attention to the resulting lot size)
$10 divided by 50 pips = 0.20 20 cents per pip, this is 0.02 Lots because 0.01 = 10 cents per pip
now. IMAGINE WHAT WOULD HAPPEN if you used 0.1 Lots, but set the Stop Loss to 50 pips
well… $1 per pip x 50 pips = $50 Lost
when you should have lost no more than $10