Trading Tips: Calculating Forex Trade Sizes
Trading Tips: Calculating Your Forex Trade Sizes
One of the most challenging aspects of trading forex for new traders is getting familiar with what trade size (stated as volume on the MT4 trading platform) is right for them.
Once you choose your trade size then you as a trader can calculate what potential profit or risk that trade has for your account and how much movement your trading account can sustain if the market moves against one or more trades.
Trade sizes for currency pairs of 1 lot = 100,000 of the currency you are trading. So, then 0.10 would equal 10,000 units of that currency and 0.01 would equal 1,000 of that currency.
When you are calculating a trade’s potential profit or risk you want to remember a simple formula that the size of the trade multiplied by the movement of the price = the potential profit or risk for the trading account.
This is a good opportunity to remember that forex trades are measured in pips and micro-pips (points) for tracking movements.
Let’s review what a pip and micro-pip is.
Most currency pair prices will show five decimal places right of the decimal point such as 1.30289 GBP/USD for example. In this example, 1.30289, the last digit is always a micro-pip or also called a point and is often seen as smaller than the other numbers and it is there to help show movement and to calculate the spread (the difference between the buy and sell price and the amount paid for opening the trade).
The numbers to the left of the micro-pip are the pips; so, in 1.30289, the 28 would be pips and if we were looking at 10 pip movement, 1.30389 would be a 10 pip movement up and 1.30189 would be a 10 pip movement down.
When trading you will profit or expose yourself to risk in the secondary currency in the pair. So, if trading the GBP/USD that trade will be calculated in the USD and if your account is in US dollars then no further conversion will need to be calculated.
So, any pair with the USD as a secondary currency would be calculated the same way whether it’s the EUR/USD. GBP/USD, AUD/USD, or NZD/USD while the USD/JPY and USD/ZAR would need to convert the exchange rate of the JPY or ZAR to calculate how much you were getting paid or risking in USD on a trade on either of those two pairs.
Let’s go over an example.
You decide you want to trade on the EUR/USD (the most commonly traded currency pair) and you have, for example, $10,000 of available equity in your trading account. If you decided to trade on 1 lot, that size trades moves $10 per pip on a 1 lot trade. In such a case, then a 0.10 trade would return or risk $1 on a 1 pip move and therefore a 0.01 trade would require a 10 pip move per $1 expected of risk or reward.
With a 1 lot trade if there were no other factors then a 1 lot trade would have to move 1,000 pips against you to risk your total amount of equity since 1 lot (100,000 of a currency) times 1,000 pip movement and each pip movement equals $10 per pip. So then with a $1,000 USD account, a 0.10 trade would put that account at the same level of risk and potential profit as a 1 lot trade on a $10,000 USD account.
It’s important to remember if your equity reaches 20% of your required margin used in your open trades this will activate a stop out on a margin call.
The stop out is a standard safe-guard to protect both the trader and trading company from trading accounts going to zero or even into a negative balance. It will cause trades to close one by one to help keep the account from staying at or below the 20% threshold. Extreme market movements on large trades can push equity below the 20% margin but traders are protected from their account going negative.
For XXX/USD pairs, $500 is the standard cost of margin used with 1 lot to trade because 1 lot (100,000) divided by 200 (the leverage offered on most currencies) = 500. Therefore it costs $50 USD per 0.10 or $5 USD per 0.01. A trader should remember these are not actual non recoverable costs but just how much of your account is reserved to open and sustain a trade until it is closed automatically or by the trader.
Traders using these calculations can set targets for themselves and their account if their using the MetaTrader 4 (MT4) trading platform for their computer or smartphone.
The Sirix web trader platform, which can be accessed on the CM Trading website, can show potential profits and risk by setting the take profit and/or stop loss and the trade size with a direction before opening a trade.
If you want up to date insights into what's happening in the market, CM Trading provides Free Daily Forex News which can key you into which forex pairs could have significant movements.
If you have a CM Trading account and you want to review a trade and its parameters you can talk to your Market Analyst before opening a trade.
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