Accurately calculate your position size
In this weekly video:
00:26 – Calculate your lot size easily
00:54 – Many traders misunderstand the importance of this
01:29 – Every trade has an equal and known risk
02:33 – How to calculate your risk – there are many factors
03:13 – Get my Calculator for free
04:45 – Changing your thought process
Would you like to know how to accurately calculate the position size that you need on your trade in order to keep your risk low? Listen up, I've got some great news.
Hi Forex Traders, Andrew Mitchem here, the Forex Trading Coach Video and Podcast number 272.
Calculate your lot size easily
I'm going to explain how you can accurately and easily calculate the lot size or the position size that you need to place on each and every one of your trades in order to help you trade better, to help you with your psychology, and to help keep your risk per trade low and equal regardless of the trade, the size of the stop loss, or the timeframe. So I'm sure you'd like to know how to do that.
Many traders misunderstand the importance of this
Well, before that I'm just going to read an email that came through here and it said, “I loved the video that you did on the risk calculator, but could you explain more? I think it's a massive misunderstanding amongst many traders, and the way you explain it makes so much sense to me. Can you make another video so I can get a better understanding?” That's quite interesting that the person says that most people have a massive misunderstanding, and I think it's absolutely true. That is a big, big problem amongst Forex traders.
Every trade has an equal and known risk
So the way that I trade is every single trade that I take has an equal and known risk. So people get too worried about what the stop loss needs to be and how many pips that is; it doesn't really matter. By getting your mentality away from thinking about making profit or loss in pips, what it does is it gets you thinking like a professional trader who thinks in terms of your risk to reward, win rates, and controlling risk per trade.
Every single trade that I take has the same amount of risk; the same percentage of my account at risk regardless of what currency pair it is, what the timeframe chart is, whether it's a longer term trade, a short timeframe trade, doesn't matter. They all have equal risk. That helps me to trade with less emotions. All the trades I've got going behind me here, every single one of them, is controlled.
How to calculate your risk – there are many factors
So if a number of them go wrong it doesn't really matter, because I have the risk controlled and I know that on my profitable trades I have high reward to risk.
So how do you do it? Well, as you would likely know, and if you don't you soon will, each currency pair pays out a different amount per pip. So the manual, old fashioned way of doing this is quite slow and it's quite difficult and it takes a fair bit of calculation. Because it also depends on what your account is denominated in. So as an example, if you have a US dollar account or a British pound account or an Aussie or a Kiwi dollar account, whatever it might be, the amount that you get paid per pip of movement up and down is different depending on your account.
Get my Calculator for free
So I have an amazing lot size calculator; it's freely available and I have placed … Or will be placing, a link below this video and podcast so you can download it for free.
Let me explain how it works. Rather than going through that whole complicated calculation, you don't need to do any of that. All you do is you drag the script, it is a script not an indicator, so when you download it and you start coming back to me going, “Andrew it doesn't work,” it's a script. Don't put it under indicators. So you drag the script onto the chart that you're about to trade. So let's say you're about to trade the Euro/US dollar. You drag the script onto a chart which has the Euro/US dollar on it.
You know your stop loss that the trade needs to have, and the script is automatically defaulted to risk half of one percent. You can change that to a quarter of a percent, or one percent. Whatever you want to risk on that. All you do is enter one number, and it's the stop loss for that particular trade, and press okay. The calculator will then tell you the lot size or position size needed for that particular trade. So it knows your account denomination, it knows your account balance, and it also knows because you dragged it onto this particular chart, what the currency pair is that you're about to trade.
So it works it all out for you and it gives you a number. If you enter that number as your position size with a stop loss that you've calculated, and the trade goes against you, you will lose the risk that you have calculated. So in my personal case half of one percent. Real simple, real easy to use.
Changing your thought process
It helps to change your mentality and your thought process, and it then allows you to take trades with controlled and known risk, rather than going, “I lost 100 pips on this trade, but I gained 20 pips on that trade, therefore I'm still negative. I'm still minus 80 pips.” That is not how you take position sizes, and that's not how you trade. If you have equal risk on every trade, that will massively help you.
So use that calculator. It's freely available here on this site; I'll put a link below this video. It works on the MT4 platform. You will love it, I know you will because it's been downloaded so many … tens of thousands, I think about 30,000 times at the last look. People all around the world have used it for years and years. Use it on every trade you take, it will help you massively.
So, I hope that helps. This is Andrew Mitchem, the Forex Trading Coach. I'll see you this time next week.