The increasing market activity and value in Forex trading have been the norm since its very first establishment. Now that trading has been more accessible, and is being done by millennials, the international worth of the Forex market has spiked to a whopping $1,934,500,000,000.
This makes the market 12 times larger than futures markets. Whether you are new or a veteran in the industry, you must be aware of the trends and inner-workings of the market. One of the most crucial things to consider when trying to get ahead with Forex trading is choosing the appropriate lot size. This involves a keen and critical risk management system and thorough decision-making.
A Quick Review on Lot in Forex
Before elaborating further, it is good to review some of the basics. What is LOT in Forex? Here is a brief explanation.
“Lot” in Forex essentially pertains to the number of units that a trader will buy or sell. Thus, it is considered as the unit of the transactions being made. Orders placed in trading platforms come in the form of sizes encapsulated in lots.
Forex lot sizes then correspond to a standard amount of units being traded. Lot sizes are of different types:
- Standard lot – represents 100,000 units
- Mini lot – corresponds to 10,000 units
- Micro lot – equates to 1,000 units
- Nano lot – ranges below 1,000 units
Right Lot Size Is Important
Note that your chosen lot size can make or break your trading game. The lot size must be appropriate according to the current trading assets you have at hand and the trading goal that you are aiming for – whether it be a practice trade, or trading live.
Lot size can directly impact the risk that you will take in your transactions. It can directly influence the market movement and activity of your accounts. Hence, it should be given ample and thoughtful consideration.
Effective Risk Management Guide
Risk is an integral part of trading. Managing it is all about keeping your money in check and protecting the capital that you bring to the table. Thus the very first thing traders must look into is the risk they are betting on when making trades. Here are other helpful strategies too that can help you in your trading in the long run.
Minimizing Risk per Trade
Forex trading is extremely volatile in the sense that technical analysis of market movements does not always guarantee a profit. Trading on high-risk rates only allows for a minimum room for error, and it could quickly endanger profitability.
Setting the 5% risks on trades might be smarter than going ahead with 10% despite having a high percentage of winning. Note that this is always a game of probability. Thus it is best to leave a wide margin of error to maintain a stable capital. Playing too much on risks might get you at high drawbacks and force you to make hard efforts just to return to a deadlock.
Converting Lot Size into Cash
This is one of the most basic yet commonly overlooked trading skills, especially by beginners. To convert lot size into cash, simply move the decimal point to the right once. For example, a lot size of 0.83 would amount to $8.30.
This is the simplest and easiest thing you can control towards building smarter risk management in your trades. This ensures that you input the correct lot size and would not blow your account with tremendous losses due to miscalculation.
Risk vs. Reward
The next thing to consider is how to calculate the amount you stand to lose in a trade vis-à-vis how much you stand to make a trade. It is all about assessing the risk that you will take and the profit you can potentially earn from every trade.
To do this, take note of your entry line, stop loss, take profit. You can visualize the risk that you take by calculating the difference between your entry point and stop loss (entry point – stop loss). Consequently, the reward you can earn is the difference between the entry point and take profit (entry point – take profit).
For example:
- Entry: 0.76891
- Stop Loss: 0.77061
- Take Profit: 0.76369
To make the discussion simple, disregard the last values in each variable, then proceed with the calculation of risk and reward.
Again, to calculate the risk, subtract the stop loss from the entry point. You will get a difference of -0.0017. Disregard the negative signs and the zeroes, and you will get a risk of 17 pips. Accordingly, subtract take profit from the entry point to get the reward. It will amount to 0.0053. Applying the same principle, you will get a reward of 53 pips.
Knowing these techniques can aid you in setting a more apt lot size in your trades.