Here is a complete checklist to determine the most important aspect of money management, position sizing:
1. What is my account balance? $4234.58
2. What percentage of my account balance will I be risking? 1.0%
3. What is my stop loss on this particular trade? 50 pips
4. What currency pair am I trading? GBP/USD
5. How much is a pip worth on a 10K (mini) account? $1
6. CALCULATION What is my dollar risk amount? (Account Balance x Percentage Risk) $42.35
7. CALCULATION What is my position size (Dollar Risk Amount x 10000) ÷ (Stop Loss x Pip Worth)
It’s up to you to determine what percentage of your account balance that you want to risk. I’ve heard traders risking from 1.0%-5.0% per trade. I risk no more than 1.0%. It’s important to determine what your stop loss will be before continuing with the checklist. None.
This is the hardest to determine by hand with the exception of currency pairs with the USD in the quote currency such as the GBP/USD, EUR/USD, and AUD/USD. These currency pairs always have a pip worth of $1 on a 10K (mini) account. Take the account balance and multiply it by .01 (1.0%), .02 (2.0%), etc. to obtain your dollar risk amount. This is the most important calculation. Do it right.
EXAMPLE #1 (Answer questions 1 - 7)
USING A CALCULATOR-> ($4234 x .01) = $42.35
USING A CALCULATOR-> ($42.35 x 10000) ÷ (50 x $1) = (423500) ÷ (50) = 8470 units
What you might be thinking… I can only trade a mini-lot which is 10,000 units. This is more than my calculated position size. This means that you are under-capitalized. You need more capital to trade mini-lots. Another option is to use a variable-lot size broker like Oanda where you can specify 8470 units. Another option is to risk a smaller percentage per trade (use 0.5%.)
EXAMPLE #2 (Answer questions 1 - 7)
USING A CALCULATOR-> ($10582.26 x .02) = $211.65
USING A CALCULATOR-> ($211.65 x 10000) ÷ (75 x $0.8829) = (2116500) ÷ (66.22) = 31962 units
In this example, you could enter a trade in the USD/JPY with 3 mini-lots or 30,000 units. If you have a variable-lot size broker like Oanda, you can enter a trade with 31,962 units. There may be a better or quicker formula for calculating position size. This method works but if you know of a more efficient way, let me know. FYI if this is a bit complicated for some of you, no need to worry as the forex megadroid software automatically trades with conservative settings, but risk automatically increases as the account coutinues to grow. The URL for this automated trading platform is:
http://forextradingexpert.mirrorz.com/. The above method is moreless for manual trading strategies.