Working out your ‘lots’

Filed under: Learn Forex Trading |

 

Probably the hardest thing for a beginner to forex trading is the concept of trading in lots. To begin with, you have to choose whether your account is a micro lot account, a mini lot account, or a standard lot account! If you are trading with a US dollar account, things are much easier to understand. In a micro lot account, one pip would be equal to $0.10, in a micro account one pip would be $1, and in a standard account one pip would be equal to $10. However, if you have a GBP account like me, then you have to do some added calculations and factor in the exchange rate between the US dollar and the British pound.

 

However, if you are risking a certain percentage of your bank on each trade, then the calculations get even more extensive. For example, if you have a GBP account and you have a bank of 10,000 GBP, and you want to risk 1% of this bank on each trade, then your risk for each trade will be 100 GBP. However, if you are trading based on price action and support/resistance levels then your stop loss will be a variable amount of pips on each trade. Therefore, if you just traded, say, 0.2 lots on every trade, then your risk would be variable on every trade, and this is not what you want.

 

Let’s go through an example. Say you are making a trade on the CHF/USD pair and you want a stop loss placed 458 pips away from your entry and you want to risk 100 GBP on the trade. How many lots should you trade in a mini account? Well, your calculation will be:

 

(100 (your risk) / 458 (the amount of pips)) * 1.57 (the exchange rate between the GBP and USD) = 0.34 lots

 

If you had a micro account then it would be 3.4 lots, and if this were a standard account, it would be 0.034 lots (although it would have to be 0.3 as you cannot buy 0.034 lots). Working out how many lots you should buy is important and unless you always risk X amount of pips for X amount of money, then you will have to make these calculations. The good news is, you can put all of these calculations into an excel spread sheet so that you only ever have to do it once!

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