3 Step Guide to Determine Your Trade Size

DailyFX

Article Summary: A good forex trading strategy incorporates more than simply identifying entries and exits on a trade. Trading in a size in proportion to your account size can make a difference in bringing consistent results.

Whether you trade manually or through an automated forex trading strategy, traders place too much emphasis on each individual trade. They simply expect too much on that individual trade and as a result, they risk a significant amount of their capital on one trade.

To bring more consistent results, incorporate into your manual strategy or your automated strategya trade size element so the trading plan includes not only what your buy and sell rules are, but what trade size you are going to place.

We discuss in our DailyFX EDU courses risking less than 5% of your capital on all open trades. If you are going to have 5 trades open, that means 5% for all of the trades in aggregate and not on each individual position.

However, calculating the trade size to place can be a challenging exercise, especially if you are not gifted in math. Follow this simple 3 step process to have the trade size calculated for you.

  1. Identify your entry and stop loss prices
  2. Identify how much capital you wish to risk
  3. Enter the figures into the Risk Management Calculator

Identify your entry and stop loss prices

Let’s assume you have identified a trading opportunity in the AUDJPY from the DailyFX Plus Trading signals (depicted below).

3_Steps_to_Determine_Your_Trade_Size_body_Picture_7.png, 3 Step Guide to Determine Your Trade Size

Presented by the DailyFX Plus Trading Signals Momentum App

At the time of this writing, the AUDJPY was trading at 99.34. Let’s assume you wanted to enter at 99.34 with a stop loss of 97.92. That means your stop loss distance is 142 pips. Keep this 142 pip stop loss figure handy for the calculator in step 3.

Identify how much capital you wish to risk

In our DailyFX EDU courses, we talk about risking less than 5% of your capital on ALL open trades. A trap that many traders fall into is risking 5% on EACH individual trade which is not true. If you plan to have multiple trades open, add up your risk on all of the trades and make sure the sum is no greater than 5%.

If you are not sure what percentage to risk on your trades, I would suggest starting with a conservative amount like 1% or 2%. We never know if the next trade is going to be a winner or loser, so I prefer to use 1-2% on each trade so that if I’m wrong, I still have 98-99% of our capital left over.

Regarding the breakout signal above, let’s choose a risk amount of 1%.

Enter the figures into the Risk Management Calculator

The risk management calculator is a free tool that you download into the FXCM Marketscope charts to automatically calculate a suggested trade size.

To download this app, go to the FXCM App Store and follow the download instructions.

(While downloading, make sure you have exited the platform so it can install the files to your computer. After the installation is complete, re-open the platform and you’ll see the file appear in the ‘OTHER’ section of the indicator pop up window.)

Add the indicator to your charts by right clicking anywhere on the charts and selecting “add indicator”.

View gallery

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3_Steps_to_Determine_Your_Trade_Size_body_Picture_11.png, 3 Step Guide to Determine Your Trade Size

Presented by FXCM’s Marketscope Charts

A pop up window appears like the above picture. Enter your stop loss distance from step #1 and risk percentage from step #2 in the boxes noted above then press OK.

3_Steps_to_Determine_Your_Trade_Size_body_Picture_10.png, 3 Step Guide to Determine Your Trade Size

Presented by FXCM’s Marketscope Charts

The indicator will appear as a display field on your charts that summarizes your inputs, account equity which produces outputs of trade size, stop and take profit levels in dollar terms.

It also provides you the number of lots you would place in the account with a 142 pip stop loss to risk 1% of your balance. Notice how the stop in dollar terms is -$485.99 which is 1% of the equity.

In the example above, 32 lots would be the amount to type into market order window when you make the trade.

View gallery

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3_Steps_to_Determine_Your_Trade_Size_body_Picture_12.png, 3 Step Guide to Determine Your Trade Size

Presented by FXCM’s Marketscope Charts

So simplify your trading and bring more consistent results by consistently applying a trade size commensurate with your account size.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

Follow me on Twitter at @JWagnerFXTrader.To be added to Jeremy’s e-mail distribution list, click HERE and enter in your email information. See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.

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