Im a newbie trader and im struggling with lot sizes.
Up until now i have been using eToro which is pretty simple. Define risk, determine entry and stop loss adjust position size to suit predetermined risk.
Id like trade other markets so i have set up an account with IG and Plus500.
The calculation i have been using to determine my lot size is as follows, define risk, determine entry and stoploss, work out the difference in pips between entry and stop loss. Divide risk by number of pips and this should equal lot size. (mini for IG).
Is that correct?
Im getting wildly different position sizes across these three accounts for the same trade, etoro was ÂŁ270, IG ÂŁ150 and plus500 was ÂŁ37? And for some reason plus500 seems to have leverage fixed at 1:300?
well…
the reason why you are all over the place is because you don’t understand it correctly.
let’s examine what you said
NOW the problem with this is… HOW ARE YOU DEFINING RISK
i mean… I KNOW what it means
but you as a beginner probably don’t
and you have not told us what you mean by RISK
i’m going to make an assumption to guess that YOU THINK … RISK… IS STOP LOSS
well… yes, and no
it’s more than that.
then you have this…
yes, that’s correct, you need to know your entry point
then we have…
yes… and this only strengthens my assumption DOES IT NOT ?
you are basically only considering the difference in pips between entry and S/L and using this to calculate lot size and thinking this is the only thing you have to worry about
then…
Divide RISK by Pips
??? hehe
LOOK MATE
you are doing this… ok
if your entry is 1.0040
and you are buying
and your stop loss is at 1.0000
clearly your Difference in pips or PIP DISTANCE is 40 pips
ok great
now, you are saying to yourself
so… i’m risking 40 pips
well… yes in a way you are
but you are also risking money
and since we don’t know your account balance, you don’t know how much you are risking
so then… you might say , martin i have $1,000 Account Balance
and you may calculate it like this
$1000 divided by 40 pips = $25 per pip
which = 2.5 lots
but that’s stupid, because you are risking 100% of your account balance
because if you lose that trade, you’ll be broke
so you then have to determine HOW MUCH OF YOUR BALANCE YOU ARE RISKING
so then… let’s say you say "Martin i’ll risk 1%"
ok then we calculate this
0.01 (1%) x $1,000 = $10
Meaning… YOUR TOTAL RISK FOR THE TRADE IS $10
so… $10 divided by 40 pips = 25 cents per pip
which is 0.025 lots but you cant trade that so you convert down to 0.02 lots
now if you do that
you’ll actually lose $8 if you lose
so is this the formula then…
NO IT’S NOT
because what you are going to find is this
you are actually risking more than just the pip distance
YOU FORGOT TO FACTOR IN NOMINAL MARGIN
so if your balance is $1000
and the trade requires a nominal margin of $30
it means you have a free margin of $970 to trade with
however, if the trade reqiures $300
well then… THA’TS DIFFERENT you then only have $700 to trade with
so when you calculate that 1% of your account
you will find that it’s not really 1% is it
because
ASSUMING you trade correctly and don’t go into your margin by depleting all your funds, you’ll be ok
but, as a newbie if you stuff up YOU WILL GO INTO MARGIN
you will then lose and then ask yourself how the hell did that happen if i was only risking 1%
and the margin will depend on the instrument and your account leverage as well as the exchange rate
so you take indexes for example vs Currency
i’m in Australia and use local currency AUD
now, Currencies for me are 0.1 lots = $1 per pip
however, Indexes can be like 0.1 lots = $1.30 per pip approx
and then you take something like EUR USD vs US200 vs bitcoin
DO THIS ON DEMO
you’ll see
Watch the difference in NOMINAL MARGIN
now. why is this important
well… because if you have an account balance as a newbie of $300
and you enter a trade that has a nominal margin of $270 and you put down a lot size of 1 standard lot
you will enter the trade in margin call
and you’ll be DONE in 3 pips
and then you’ll sit there wondering HOW DID THAT HAPPEN
so RISK is more than just the pip difference from stop loss to entry
its nominal margin
it’s exchange rate
it’s account leverage
it’s probability of success given your pip distance
its the amount of account balance you have
and so much more
to correctly calculate your lot size
do this
Define how much of your account balance you wish to risk
Define what instrument you are using
Find out the Nominal margin that is required for that instrument at a certain lot size
do this… Account Balance - Nominal Margin = X
then do this 1% x X = Y
then do this … Y Divided by your pip difference = cost per pip
then convert that cost per pips into LOT SIZES
and that will give you the lot size you should use for the trade
now it’s a good idea to ask your broker if they have a MARGIN CALCULATOR
this will factor in exchange rate and leverage and will tell you what the margin is before you enter the trade
i would exactly say that was a QUICK explanation… hehe
but… You’re Welcome.
and don’t forget that THE INSTRUMENT YOU USE will determine the lot size to some degree.
Example
in currency 0.1 lots = $1 per pip generally
in indexes this will vary and you will find that 1.0 lot is $1.something per pip
then of course you have the confusion that comes from the JPY
this is why it is highly recommended to try these things on Demo first
@DenzelLN
sometimes it helps to get another point of view or different opinion
My suggestion
get @Falstaff to explain it to you IN HIS WORDS and maybe that will make more sense to you than my words.
i mean, you said you got something from my explanation
now… maybe that small bit that you didn’t get was something that i didn’t explain properly.
and maybe @falstaff can fill the gap
i say ask him
be clear with your question , i think he’s ready to answer, because he did say this…
Ok EURUSD sits at 1.20267 on my chart - the “pip level” is the 4th decimal place - ie the “6” (the 7 is what is called “pipettes” or “points” - That is just there to confuse the issue - lol ) I usualy ignore the final decimal so I woud say it sits at 1.2026 (in PIPS)
If it moves from 1.2026 to 1.2029, it has moved 3 “Pips” upwards.
In theory, if you “BUY” - 1 LOT, you have taken control of 100,000 “units” at 1.2026 and if it moves as above, your 3 pip movement translates into a $30 gain, because each"pip / lot" is worth $10.
Now $10 per pip is way too steep for most retail traders, so we trade smaller amounts;
One “mini-lot” gives control of 10,000 units. It is 1/10th of the value and a “Pip/minilot” of movement is worth $1.
A “micro-lot” is 1/10 th of that value, so gives control of 1,000 units and a "micro-lot / pip is worth $0.10, so tha 3 pip movement above would give rise to a 30 cent “profit”
If you were operating “1 micro-lot” and you wanted to risk $5, your stop loss could be placed 5 / 0.10 pips away - now $5 divided by $0.10 per pip - gives you the leeway to place your stop 50 pips away.
If you know where you want your stop and it happens to be 25 pips away from price now and you still want to bet $5, Your calculation becomes $5 divided by 25 pips = $0.20 per pip.
But we know 1 micro lot = $0.10 per pip, so you could now afford to but 2 x micro -lots to risk your $5.
You need to do this on “demo” until it becomes second nature and you are completely comfortable with it.
You will also find “Spreads” and possibly “commissions” and “swaps” complicate the issue - depending on which broker you use.
It might be easier if describe the trade im looking at. Im looking to short CHFJPY at some point.
My account is $2700.00 Im willing to risk 3% per trade, so $81.00, The stop loss on this trade is 116.02 and entry is 115.14 which gives us 88 pips.
This is where i am so far, (2700x3%)/88, gives me a lot size of 0.92.
Where im stuck is, what is the 0.92 value? mini lot size, standard lot size, risk value per pip?
The calculation above is what i have seen everywhere, but im unclear on what the end result is, does this calculation always give the answer pertaining to mini lots? So if the answer was 11, you would order 1.1 standard lots?
HOWEVER _ YEn denominated instruments work different ! the cost of a lot is approx the same $10 - but not exact, so if you really want to risk $81, no more, no less - you’ll have to look it up !