Sizing is very important in Forex trading. Sizing determines lot size for one open trade position. Each open trade position can have different lot size. In Forex trading, trading unit known as ‘lot’. ‘Lot’ represents the minimum quantity of currency that may be traded. ‘Lot’ determines how much money the trader puts in one trade position. One lot size equals to certain dollar amount. It has correlation with forex account type.
The main goal of sizing is to protect capital. Trader must realize that not all trades are profitable. There will be losses in some trades. With right sizing, traders minimize/control their losses. Trading with right lots size is important for increasing profits, reducing losses, controlling risks during the trade (sell-part profit or loss), etc. For beginner, as a rule of thumb, the smaller the lot size, the better. The reason is, with small lot size, trading risk will be smaller too and it will provide more room to trade other pairs.
General formula to size (a standard account) is [Account balance * (% risk)] = Dollar value of risk. Next, take the range number and times it by ten. This equals the average risk in dollars. The size of the trade = Dollar value of risk /average risk in dollars.
Lets see the example:
The account balance is $1000, trader want to risk 1% of it. So, [$1000 * 1%] = $10.
Next, the market range is 87.2 pips. Then 87.2 *10 = $872
The lot size will be : $10/$872 = 0.01
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