The next area that needs attention is position size. That is, we need to talk about how much we are willing to trade with when we buy or sell a currency pair. With a %R and stops that fit the trade there actually isn’t a set trade size that we will be using. Instead we will be calculating the trade size based on the numbers we came up with in the previous two chapters. Some traders take the point of view that simply setting stops is enough to manage risk.
They predetermine how much they are willing to trade based on a percentage of their initial account and set their stops when they trade. This idea is
really only managing your risk in part, and it isn’t enough.
Calculating a proper trade size will ensure that the work we have done this far means something. When we are on a losing streak and our balance is
lower we will be trading less, and as your account grows you will trade more. This is very important to both maximize profits and manage your losses.
In this case, there isn’t a lot to say, so let’s just dive right in!
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*Information you need before hand
When calculating your trade size there are a few pieces of information you need ahead of time. We need to know our %R and we need to know the stop level ahead of time. For the purposes of example let’s look at an example
The example is 1 Hour USD/CAN chart with the Automatic Trade Range indicator added. The current ATR is 0.0035, so if we were to enter this trade
we would be using a (0.0035*2 = 0.0070) 70 pip stop.
The final piece of information that we need is a $ value for 1 pip when trading one lot. I purposely chose the USD/CAN currency pair to demonstrate how to calculate this.
If you always trade the EUR/USD pair or the GBP/USD pair then you needn’t make this calculation since a pip will always be worth $1 for mini-lots and $10 for full lots.
To calculate a per-pip value for the USD/CAN pair, here’s the formula:
(1 pip with proper decimal placement/exchange rate) * lot size = pip value
So in this case we get:
(0.0001/1.1550) * 10,000 = $0.8658 per pip for a
mini lot or
(0.0001/1.1550) * 100,000 =$8.6580 for a full
lot.
In other words for every lot of USD/CAN currency we trade. If it moves one pip we are earning or loosing if the trade goes against you $8.6580
That’s all for today.
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