How Much to Risk per Trade and How to Calculate that Risk?
#405: How Much to Risk per Trade and How to Calculate that Risk?
In this video:
00:29 – Email from a podcast listener
00:59 – How do you calculate your risk amount
01:20 – Download my MT4/MT5 Lot Size Calculator
01:55 – The logic behind lot sizing</span
02:38 – Lot size examples
04:58 – How to use the Lot Size Calculator trading script
05:27 – Know the stop loss size of your trade to calculate your lot size needed
06:29 – Email me any topics you’d like me to discuss on future videos and podcasts
How much should you risk per trade? And also how do you calculate that risk? Let’s talk about that and more right now.
Hi Forex traders, it is Andrew Mitchem here at The Forex Trading Coach with video and podcast number 405.
Email from a podcast listener
I’ve received an email this week from a trader called Diop, and Diop by the way you said you’ve started listening to all my podcasts and you’re currently up to number 202. You’re about half way; this is number 405. So well done for listening through to those. You said you’re really enjoying them and you understand the concept of… You said you’ve been looking online and you should risk somewhere between 1-5% of your account per trade. You also know that in my case I suggest that’s still way too high, and you should actually be half of that. You should actually be half of 1% risk per trade.
How do you calculate your risk amount
But your question is how do you calculate that and what do you do with your trading in order to make that happen? And to ensure that you have controlled risk but also some of those bigger stop-loss trades aren’t going to wipe out your gains.
I can see where you’re coming from, but also I think there’s a slight misunderstanding there.
Download my MT4/MT5 Lot Size Calculator
I’ve given you the very quick answer, the quick answer is to download my lot size calculator. It works on MT4 and MT5 and I will put a link on this video and podcast post so you can get a free copy. Of course, that applies to anybody who would like a free copy of that. It’s really, really easy and it takes you about five seconds to do. All you do with it is you drag it onto your chart, you put the stop-loss of the trade that you’re wishing to take, literally just type it in and press okay and it will tell you the lot size that you need for that trade.
The logic behind lot sizing
So the thing that you need to understand from a manual point of view, to understand the workings behind that, is that you have to understand that different currency pairs pay a different amount per pip depending on what the currency pair is and also what your own account denomination is. So Diop I notice you’re talking about your account being in pounds. So your account in British Pounds, let’s say with £100.00 would obviously be very, very different to my account with $100.00 New Zealand Dollars, or someone with $100.00 US Dollars. So it’s the account denomination that is affected plus it’s each individual currency pair that has different amounts per pip.
Lot size examples
But, for the sake of this, let’s say very easy round numbers. Let’s say we have a US Dollar account and we’re trading the Pound/US or the Euro/US. Notice that the US is second there in each of those currencies. If you’re trading one standard lot, that’s 1.0 lots, that pays $10.00 per pip. If you are trading a mini lot, that is 0.1 lots, that pays $1.00 per pip. If you are trading a micro lot, that is 0.01 lots, that pays $0.10 per pip.
Now let’s say for example, and again ease of numbers, so let’s say you have a $10,000.00 account. If you have that $10,000.00 account it means if you’re risking half of 1% on your trade it means you are risking $50.00 on that trade. So $50.00 per trade. It doesn’t matter what the stop-loss is, what the timeframe is. Let’s say it’s $50.00 per trade you are risking, because that is half of 1% of your account, which is $10,000.00. Okay? So let’s say you were doing that. If you have a 50 pip stop-loss, again for ease of numbers ease of calculation, you’re risking $50.00 you have a 50 pip stop-loss. Therefore, you need to trade at 1.0 lots. One mini lot on that particular trade. Because it means you’re risking $1.00 per pip. 50 pips goes the wrong way, it means you’ve lost $50.00 and therefore that means you’ve lost the pre-known amount on your account, which is half of 1%.
So let’s now use the example of a trade with a 100 pip stop-loss. Therefore, you need to risk half of the previous lot size because you’ve gone from a 50 pip stop-loss to a 100 pip stop-loss. Therefore, instead of risking 0.1 lots per trade, if you trade now has a 100 pip stop-loss, you need to risk 0.05 pips per trade. Five micro lots. Therefore, as another example, if the trade has a 25 pip stop-loss, you need to risk double. So instead of 0.1 lots you’re now risking 0.2 lots.
Now, that should be fairly straightforward. And if you struggle with that, just go through the numbers, the basic numbers and you’ll soon figure that out.
How to use the Lot Size Calculator trading script
But as I said, the easiest way of doing that is to forget the manual side of things, drag on my script, put in the stop-loss, it tells you answer. Because the great thing about the script is it knows your account size because it can read it off MT4. It knows the account denomination because it can read it off MT4, and it knows what chart you’re looking at trading because you’re dragging it on to that particular chart. Very, very simple. It’s a massive time saver. It keeps you risk-controlled and known.
Know the stop loss size of your trade to calculate your lot size needed
So, don’t forget. First of all you do need to know the stop-loss size of your trade in pips. It’s the only real time you need to worry about pips. You’ve measured the stop-loss of your trade in pips, but it is the lot size that you place on that trade that is the big determining factor that keeps your risk low per trade. Don’t just go placing 0.1 lots of a trade, or 0.05 or whatever it is. Don’t just do the same on every trade regardless of its stop-loss size or its currency pair that you’re trading. The important thing is that you have low controlled and known risks on every single trade. Therefore, you could trade a weekly chart trade that may need to have a 150 pip stop-loss, or you can trade a five minute chart trade that might need to have an eight pip stop-loss as an example. So every trade has the same risk, it’s the lot size that you place on that trade that is the thing that changes.
Email me any topics you’d like me to discuss on future videos and podcasts
So, Diop I hope that helps. If anybody else has any questions just like this, and thank you very much for emailing that through as well by the way. If you have any questions like this that you’d like me to cover on future videos and podcasts to help you out, we are here to help.
So once again, this is Andrew Mitchem at The Forex Trading Coach. Don’t forget to download my lot size calculator. It will be on this page. Bye for now, see you next week.
Episode Title: #405: How Much to Risk per Trade and How to Calculate that Risk?