Oil and Indices Lot Size

Beginner Questions
1

Hi,

No doubt this has been asked before but I’ve used search function and couldn’t find my answer.

I just started and am struggling to calculate lot size on oil and indices based on risking 1% of my account.

Any pointers please?

2

I will try to answer your question with some basics that you should be able to find on Baby Pips School of Pipsology on position sizing. Let’s say you have a $1,000 account and you decide that you wish to risk no more than 1% of your account on any particular trade. 1% of $1,000 is $10. So the maximum amount you wish to lose is $10.00. Let’s say that you wish to go long the GBP against the USD, you see that the daily ATR is 50 PIPs (50/10,000 = 0.005% of the nominal exchange rate. Say it is GBP = 1.3000 USD. You want to go long for a $10 risk. So you are prepared to lose $10 for 50 PIPs. You enter long at 1.3000 with a stop loss of 50 PIPs that represents $10. So $10/50PIPs is $0.20 per PIP. You set a take profit at 1.3100 for a 2:1 reward to risk ratio, and if the pair reaches GBP1.0000 = USD1.3100, you take 100 PIPs profit, or $20.

Note I did not refer to a lot size here. You don’t need to know how much per lot you are risking - just the $ / PIP. I hope this helps to clear this up. I do not trade oil but to answer your question, the answerer would need to know if it were WTI, Brent or other.

3

Thanks for the reply but calculators cover currency pairs so for now I don’t need to know the long version on how to calculate.

To place a trade on oil or an indice I really need to understand how to calculate lot size based on risk

4

Hi,
I will try again. Which oil contract, and which index do you wish to use as examples?

1 Like
5

Hi, the DJ30 with my broker which is I believe in n the DJI on others… that would be a great help thanks and as the others Indices are similar could apply to them.

I can calculate Oil and Gold on my risk calculator so can learn how to do it in paper later on.

Thanks

6

Hi Paul,
In the example linked below the DJ30 is the Dow Jones industrial average (index). The formula given is that the contract size is 1 unit. The volume is the amount you decide to risk per Dow unit (eg given is that open price is 22,092.20 and closing price is 22,159.70). A Dow unit is 1/22,092.20 of the open price. So if your volume is chosen as $1 per unit, you are risking $1 for every one point move in the Dow index. In the example, you go long at 22,092.20 with one contract, and a volume of $1 per unit. The Dow moves in your favour from 22,092.20 to 22,159.70. The difference is 67.5 units. So your profit is $67.50. If you wanted to set a stop loss to represent a $50 risk, it would be at open price MINUS 50 points, or 22,092.20 minus 50 = 22,042.20. So if the Dow moves 2% down, (98% of 22,092.20 = 21,650, you get stopped out at 22,042.20 and lose your $50. If the Dow moves up by 2%, from open of 22,092.20 to 22,534.04, it moves up by 441.84 points and you sell for a profit of 441.84 x volume per unit $1 = $441.84 profit minus spread. That is 8.8 times your stake.

I don’t know any other way around calculating from first principles. Except that most broker packages would tell you what your risk is in USD when you set a stop loss, so that may be a moot point.

By the way, I have never traded any Dow index or any other than FTSE100 and FTSE250, but I would feel confident to apply the first principles here if I wished to do so.

Good luck with DJ30 trading, just be careful not to miss a decimal point or two. It could be costly.

7

Thank you! That’s a great help!