Every potential marketplace has a host of benefits and drawbacks. Understanding the market is crucial to succeeding or failing when it comes to your investments. Never is this more true than with the foreign exchange market, or Forex. The most dynamic and international market in the world, the Forex market is open 24 hours on weekdays and deals in the largest asset class in the world. Involving itself in currencies as well as things like gold and silver, the Forex market responds to international events in ways that no other market even comes close. Decentralized, it represents one of the closest attempts at creating an entirely free market.
With all of this in mind, it often takes experts years to learn the market and figure out how to safely invest in it. If you are interested in reducing your risk in the marketplace, then there are several techniques used. One such technique includes calculating trade sizes. Let’s briefly review what this technique accomplishes and the various steps that comprise it.
Calculating Trade Size
Risk management is one of the most important tools any trader can have. To this end, working on proper position sizing can help to minimize risk while also diversifying your portfolio, resulting in less loss if any one particular investment goes south. Calculating trade size for online Forex is a skill best understood instead of leaving it to a random online calculator.
- The first step is in determining your account size.
- The second step is determining your risk for trade. Often, 2% is suggested. If you were investing $10,000, then your risk per trade would be $200 per trade.
- Now, convert the risk per trade from your base currency to the currency you want to be trading in. If we did USD to EUR at a conversation rate of 1.25, then we take the $200 per trade and divide it by this amount, getting $160.
- Next, you will want to determine the number of pips before your stop loss from your entry point. From this you can determine your risk per pip.
- Depending on the nature of your trading, you may have available standard, mini, macro, or nano lots. Determine which one you have to figure out how much you will lose with every market fluctuation.
A useful tool for Forex, the calculating trade size is also a potentially useful tool when directed towards the gold market.