How to Calculate Your Lot Size Correctly & Easily
#374: How to Calculate Your Lot Size Correctly & Easily
In this video:
00:26 – Understanding Lot Sizes
00:58 – The problem with the way most people trade
01:57 – Different pairs pay a different amount per pips
02:50 – Place the stop loss at the correct level
03:29 – Use my Lot Size Calculator
04:48 – Allows you to be smart with your trading
05:21 – Weekly chart trades made good money this week
06:11 – Controlling risk and your emotions
How do you calculate the lot size that you need on every trade so that you can control your risk and your emotions? Let’s talk about that and more, right now.
Hey Forex Traders, Andrew Mitchem here at the Forex Trading Coach with video and podcast number 374.
Understanding Lot Sizes
I thought I’d come outside today as it’s a lovely winter’s day here in Nelson. Lots of good feedback on last week’s video, when I took you on a helicopter trip. So glad that you enjoyed that and I figured, well it’s so good, let’s get outside again today and explain the very important topic regarding what makes the difference between potentially a losing Forex trader and a successful Forex trader. It comes down to money management and risk and understanding how to calculate the lot size that you need.
The problem with the way most people trade
You see, the problem is that most people when they trade is they will put on 0.1 lots or 1.0 lots, something like that. I did exactly the same 16 plus years ago when I started trading. Because that’s what you think you should do. When you see people showing trades online they’ll put something like, you get paid $10.00 per pip and if you make 100 pips that equals $1,000.00. The problem is that’s not quite right. It’s quite a bad way of trading. Let me explain why. In order to trade with low risk and controlled risk, what you need to do is actually calculate the lot size that you need on every trade that’s specific to that trade. You can’t just go and say, well I’m going to put on 0.1 lots on every trade. It’s not a good way of trading because you’re going to find that you have different risk on each trade.
Different pairs pay a different amount per pips
Different currency pairs pay a different amount per pip depending on what currency pair you’re trading. But not only that, it also depends on what the account your trading is based in. For example, it may be in US dollars, it might be in New Zealand dollars, it may be in British pounds. So you can’t just say that every trade is $10.00 per pip or $1.00 a pip, because that’s assuming that you’re trading something like Euro/US dollar or the Pound/US dollar, and your account is in US dollars. If it’s not in US dollars, then the $10.00 a pip logic doesn’t even make sense anyway, it’s inaccurate. So that becomes the issue. Now it’s so easy to look online and people showing you trades that they make, like I said 100 pips equals $1,000.00. No, it’s not true. So you have to be quite careful there.
Place the stop loss at the correct level
What you need to do is actually place the stop-loss on the trade at the level it needs to be at. Don’t just go and say I’m going to put a 20 pip stop-loss in, because 20 pips doesn’t mean anything. You have to put that level at the price level where it needs to be for that specific trade. Then what you do is you then work out the dollars per pip or the pounds per pip of the currency that you’re trading and according to your account denomination. Then you work the lot size needed for that trade. So that all starts to sound a bit complicated, doesn’t it?
Use my Lot Size Calculator
The great thing about it is that I have a lot size calculator freely available on my website, and I’ll put a link next to this video and podcast, that works on any MT4 or MT5 account and all you simply do is drag it onto the screen (it’s a script, it’s not an indicator so don’t go putting it on the indicators folder it won’t work, it’s a script) drag it into your charts and it knows what your account denomination is and it knows what chart you’re putting it onto. You drag it across onto your charts and you put in your risk level, let’s say 0.5% or 1% whatever it is you want to risk, and put in the stop-loss of that trade. It tells you the exact lot size.
What that also does is it gets you away from thinking, “I cannot trade something like a daily chart because the stop-loss is too big and my account size is not big enough.” It gets you away from that mentality. Because every single trade that you take by using this calculator gives you an equal risk on your account, it doesn’t matter what the currency pair is, what the timeframe is, or what the stop-loss of that trade is or needs to be. It doesn’t matter. It will calculate to say, if this trade goes wrong and you get stopped out on this pair with x number of pips as a stop-loss, you will lose your pre-determined risk. In my case, 0.5%.
Allows you to be smart with your trading
So that enables you to do quite a few clever things. For me personally, I like to trade at 0.5% risk per trade. But if I’m sometimes seeing reversal trades I might actually reduce that to 0.25%. If I’m seeing continuation trades where I’m trading with the trend, I might keep that at 0.5%. So you can do all those kind of really fine-tuning your trading really well. That’s how you work out the lot size you need per trade. It really helps to control your emotions, it allows you to trade a variety of timeframe charts.
Weekly chart trades made good money this week
And this week is a prime example. We took three trades on the weekly charts for our members that we posted on the membership site on Monday, three fantastic trades on the weekly charts. It’s been quite a choppy week this week. Some of the other timeframes have not been particularly easy to trade, they’ve not had very many set ups.
For example, trading the weekly charts I still have controlled risk and even though my stop-loss is bigger, my position size is smaller. But my risk if the trade goes wrong is identical to if I was trading let’s say a four hour chart. So don’t think that you can’t trade a weekly chart because you might need a bigger stop-loss. By understanding risk and understanding position size like I just taught you and using my calculator, it allows you to trade all timeframe charts, all pairs regardless of the stop-loss needed for that trade.
Controlling risk and your emotions
So I hope that helps. I hope that helps you understand risk, it helps control your head, it helps control your heart. In other words, your emotions. That is a massive part of trading. If you don’t believe it is, you’re probably on a demo or very small live account. Once you start going to live accounts with bigger sizes, I can promise you that your emotions and understanding how they affect your trading is another big part of trading. So in other words, keeping risk low and controlled. If you can do that on a small account, when you go to a bigger account you can do exactly the same because your risk as a percentage is identical, therefore your emotions are in check and controlled. I hope that helps. It’s a big part of trading. Get that right and you’re on the path to success. Like I said, the lot size calculator is available on this site; there’ll be a link on here. It works on any MT4 or MT5 account, free of charge. Use it, it’s fantastic, it will massively help your trading.
So once again this is Andrew Mitchem at The Forex Trading Coach. You have a fantastic day or night, depending on when you are watching this video. I’m off to enjoy this beautiful scenery. Have a great day! Bye for now.
Episode Title: #374: How to Calculate Your Lot Size Correctly & Easily