To master risk management in Forex trading, understanding how to calculate risk is fundamental.
Let's break down the process using a straightforward formula:
Trade size = Risk capital / Price movement / 1 point cost per 1 lot
This equation revolves around three crucial elements:
Risk capital: It's imperative not to jeopardize more than 5% of your deposit per trade. For instance, if your deposit is $10,000, your risk capital would be $500.
Price movement: Estimate the potential price movement based on technical analysis or signals.
Point cost per lot: Determine this using a trader's calculator.
For instance, let's say your live account balance is $10,000, and you've decided to limit your risk to 5%. If you anticipate a currency pair movement of 80 points, you'd set your Stop Loss at 80 points. Plugging these values into the formula:
500 / 80 / 1 = 6.25 lots
This calculation implies that by opening a trade of 6.25 lots in EURUSD with a Stop Loss at 80 points, you're risking a maximum of $500.
By leveraging this method of calculating position sizing, you gain confidence in pursuing trading ideas, armed with precise knowledge of your risk exposure.